EDGAR 10-K Filing

Company CIK: 1098146
Filing Year: 2021
Filename: 1098146_10-K_2021_0001437749-21-007624.json

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ITEM 1. BUSINESS
ITEM 1. Business
General
Patriot National Bancorp, Inc. (the “Company”), a Connecticut corporation, is a one-bank holding company for Patriot Bank, N.A, a national banking association headquartered in Stamford, Fairfield County, Connecticut (the “Bank”) (collectively, “Patriot”). The Bank received its charter and com-menced operations as a national bank on August 31, 1994. The Bank has a total of nine branch offices comprised of eight branch offices located in Fairfield and New Haven Counties, Connecticut and one branch office located in Westchester County, New York as of December 31, 2020.
On March 11, 2003, the Company formed Patriot National Statutory Trust I (the “Trust”) for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures issued by the Company. The Company primarily invested the funds from the issuance of the debt in the Bank. The Bank used the proceeds to fund general operations.
On October 15, 2010, pursuant to a Securities Purchase Agreement (the “Securities Purchase Agreement”), the Company issued and sold to PNBK Holdings LLC (“Holdings”), an investment limited liability company controlled by Michael Carrazza, 3.36 million shares of its common stock at a purchase price of $15.00 per share (adjusted for a 1-for-10 reverse stock split discussed below) for an aggregate purchase price of $50.4 million. The shares sold to Holdings represented 87.6% of the Company’s then issued and outstanding common stock. In connection with the reverse stock split, the par value of the common stock was changed to $0.01 per share. Also in connection with the sale of the shares, certain directors and officers of both the Company and the Bank resigned. Such directors and officers were replaced with nominees of Holdings and Michael Carrazza became the Chairman of the Board of Directors (the “Board”) of the Company. As of the date hereof, Holdings currently owns 56.7% of the Company’s issued and outstanding common stock.
As of the date hereof, the only business of the Company is its ownership of all of the issued and outstanding capital stock of the Bank and the Trust. Except as specifically noted otherwise herein, the balance of the description of the Company’s business is a description of the Bank’s business.
On March 4, 2015, the Company effected a 1-for-10 reverse stock split.
On September 28, 2015, the Bank changed its name from Patriot National Bank to Patriot Bank, N.A.
On May 10, 2017, Joseph D. Perillo was appointed as Chief Financial Officer of Patriot effective as of May 9, 2017. Mr. Perillo’s appointment was in response to the resignation of Neil M. McDonnell, who was Chief Financial Officer of Patriot from January 5, 2016 through May 9, 2017 and who resigned on that date as an Executive Vice President and Chief Financial Officer.
On July 7, 2020, Robert G. Russell, Jr. was appointed as President and Chief Executive Officer of Patriot. Mr. Russell’s appointment was in response to the resignation of Richard A. Muskus, Jr., who was President and Director of the Company and the Bank from January 26, 2017 through April 27, 2020.
The Bedford branch was closed on February 28, 2018 and its business and staff transferred to the Scarsdale branch.
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.
Business Operations
The Bank offers commercial real estate loans, commercial business loans, SBA loans, and a variety of consumer loans with an emphasis on serving the needs of individuals, small and medium-sized businesses and professionals. The Bank previously had offered loans on residential real estate but discontinued doing so during 2013. Since 2016, Patriot has purchased residential real estate loans. Further information relating to the purchased residential real estate loans is set forth in Note 4 to the consolidated financial statements. The Bank’s lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York, although the Bank’s loan business is not necessarily limited to these areas.
Consumer and commercial deposit accounts offered include: checking, interest-bearing negotiable order of withdrawal (“NOW”), money market, time certificates of deposit, savings, prepaid deposit accounts, on-line national money market accounts, Certificate of Deposit Account Registry Service (“CDARS”), Individual Retirement Accounts (“IRAs”), and Health Savings Accounts (“HSAs”). Other services offered by the Bank include Automated Clearing House (“ACH”) transfers, lockbox, internet banking, bill paying, remote deposit capture, debit cards, money orders, traveler’s checks, and automatic teller machines (“ATMs”). In addition, the Bank may in the future offer other financial services.
On July 22, 2020, the Company completed the purchase of prepaid debit card deposits of $50.0 million from a prominent national provider and processor of prepaid debit cards for corporate, consumer and government clients.
The Bank’s branch office locations are summarized as follows:
Branch No.
City
County
State
Darien
Fairfield
Connecticut
Fairfield
Fairfield
Connecticut
Greenwich
Fairfield
Connecticut
Milford
New Haven
Connecticut
Norwalk
Fairfield
Connecticut
Orange
New Haven
Connecticut
Stamford
Fairfield
Connecticut
Westport
Fairfield
Connecticut
Scarsdale
Westchester
New York
The Stamford, Connecticut location serves as Patriot’s headquarters. Additionally, the Bank also operates a loan origination office at its Stamford location.
The Bank’s employees perform most routine day-to-day banking transactions. The Bank has entered into a number of arrangements with third-party outside service providers, who provide services such as correspondent banking, check clearing, data processing services, credit card processing and armored car carrier transport.
In the normal course of business, subject to applicable government regulations, the Bank invests a portion of its assets in investment securities, which may include government securities. The Bank’s investment portfolio strategy is to maintain a balance of high-quality diversified investments that minimizes risk, maintains adequate levels of liquidity, and limits exposure to interest rate and credit risk. Guaranteed U.S. federal government issues currently comprise the majority of the Bank’s investment portfolio.
Patriot became an approved lender under the Small Business Administration (“SBA”) program at the end of 2017, enabling it to approve loans to small businesses and entrepreneurs more quickly and efficiently. Since 2018, Patriot has hired people to support new SBA business development in Stamford, Connecticut, Florida, Georgia, Ohio, along with a Rhode Island operations center.
Employees
As of December 31, 2020, Patriot had 122 full-time equivalent employees. None of Patriot’s employees are covered by a collective bargaining agreement.
Competition
The Bank competes with a variety of financial institutions for loans and deposits in its market area. These include larger financial institutions with greater financial resources, larger branch systems and higher lending limits, as well as the ability to conduct larger advertising campaigns to attract business. The larger financial institutions may also offer additional services such as trust and international banking, which the Bank is not equipped to offer directly. When the need arises, arrangements are made with correspondent financial institutions to provide such services. To attract business in this competitive environment, the Bank relies on local promotional activities, personal contact by officers and directors, customer referrals, and its ability to distinguish itself by offering personalized and responsive banking service.
The customer base of the Bank generally is meant to be diversified, so that there is not a concentration of either loans or deposits within a single industry, a group of industries, or a single person or groups of people. The Bank is not dependent on one or a few major customers for its lending or deposit activities, the loss of any one of which would have a material adverse effect on the business of the Bank.
The Bank’s loan customers extend beyond the towns and cities in which the Bank has branch offices, including nearby towns in Fairfield and New Haven Counties in Connecticut, and Westchester County and the five boroughs of New York City in New York, although the Bank’s loan business is not necessarily limited to these areas. While the Bank does not currently hold or intend to attract significant deposit or loan business from major corporations with headquarters in its market area, the Bank believes that small manufacturers, distributors and wholesalers, and service industry professionals and related businesses, which have been attracted to this area, as well as the individuals that reside in the area, represent current and potential customers of the Bank.
In recent years, intense market demands, economic pressures, and significant legislative and regulatory actions have eroded banking industry classifications, which were once clearly defined, and have increased competition among banks, as well as other financial services institutions including non-bank competitors. This increase in competition has caused banks and other financial services institutions to diversify their services and become more cost effective. The impact of market dynamics, legislative, and regulatory changes on banks and other financial services institutions has increased customer awareness of product and service differences among competitors and increased merger activity among banks and other financial services institutions.
Supervision and Regulation
As a bank holding company, the Company’s operations are subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (the “Fed”). The Fed has established capital adequacy guidelines for bank holding companies that are similar to the Office of the Comptroller of the Currency’s (“OCC”) capital guidelines applicable to the Bank. The Bank Holding Company Act of 1956, as amended (the “BHC”), limits the types of companies that a bank holding company may acquire or organize and the activities in which it or they may engage. In general, bank holding companies and their subsidiaries are only permitted to engage in, or acquire direct control of, any company engaged in banking or in a business so closely related to banking as to be a proper incident thereto. Federal legislation enacted in 1999 authorizes certain entities to register as financial holding companies. Registered financial holding companies are permitted to engage in businesses, including securities and investment banking businesses, which are prohibited to bank holding companies. The creation of financial holding companies has had no significant impact on the Company.
Under the BHC, the Company is required to file semi-annual reports of its operations with the Fed for the period ended June 30 and for the year ended December 31. Patriot and any of its subsidiaries are subject to examination by the Fed. In addition, the Company will be required to obtain the prior approval of the Fed, with certain exceptions, to acquire more than 5% of the outstanding voting stock of any bank or bank holding company, to acquire all or substantially all of the assets of a bank, or to merge or consolidate with another bank holding company. Moreover, Patriot and any of its subsidiaries are prohibited from engaging in certain tying arrangements, in connection with any extension of credit or provision of any property or services. The Bank is also subject to certain restrictions imposed by the Federal Reserve Act on issuing any extension of credit to the Company or any of its subsidiaries, or making any investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. If the Company wants to engage in businesses permitted to financial holding companies, but not to bank holding companies, it would need to register with the Fed as a financial holding company.
The Fed has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses its view that a bank holding company should pay cash dividends only to the extent that the bank holding company’s net income for the past year is sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. The Fed has also indicated that it would be inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Fed, if any of its subsidiaries is classified as “undercapitalized”, the bank holding company may be prohibited from paying dividends.
A bank holding company is required to give the Fed prior written notice of any purchase or redemption of its outstanding equity securities, if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of its consolidated retained earnings. The Fed may disapprove of such a purchase or redemption, if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Fed order, or any condition imposed by, or written agreement with, the Fed.
The Company is subject to capital adequacy rules and guidelines issued by the Fed and the FDIC and the Bank is subject to capital adequacy rules and guidelines issued by the OCC. These substantially identical rules and guidelines require Patriot to maintain certain minimum ratios of capital to adjusted total assets and/or risk-weighted assets. Under the provisions of the FDIC Improvements Act of 1991, the federal regulatory agencies are required to implement and enforce these rules in a stringent manner. The Company is also subject to applicable provisions of Connecticut law, insofar as they do not conflict with, or are not otherwise preempted by, federal banking law. Patriot’s operations are subject to regulation, supervision, and examination by the FDIC and the OCC.
Federal and state banking regulations govern, among other things, the scope of the business of a bank, a bank holding company, or a financial holding company, the investments a bank may make, deposit reserves a bank must maintain, the establishment of branches, and the activities of a bank with respect to mergers and acquisitions. The Bank is a member of the Fed and, as such, is subject to applicable provisions of the Federal Reserve Act and regulations thereunder. The Bank is subject to the federal regulations promulgated pursuant to the Financial Institutions Supervisory Act that are designed to prevent banks from engaging in unsafe and unsound practices, as well as various other federal, state, and consumer protection laws. The Bank is also subject to the comprehensive provisions of the National Bank Act.
The OCC regulates the number and locations of branch offices of a national bank. The OCC may only permit a national bank to maintain branches in locations and under the conditions imposed by state law upon state banks. At this time, applicable Connecticut banking laws do not impose any material restrictions on the establishment of branches by Connecticut banks throughout Connecticut. New York State law is similar; however, the Bank cannot establish a branch in a New York town with a population of less than 50,000 inhabitants, if another bank is headquartered in that town.
The earnings and growth of Patriot and the banking industry in general are affected by the monetary and fiscal policies of the United States (“U.S.”) government and its agencies, particularly the Fed. The Open Market Committee of the Fed implements national monetary policy to curb inflation and combat recession. The Fed uses its power to adjust interest rates on U.S. government securities, the discount rate, and deposit reserve retention rates. The actions of the Fed influence the growth of bank loans, investments, and deposits. They also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted.
In addition to other laws and regulations, Patriot is subject to the Community Reinvestment Act (“CRA”), which requires the federal bank regulatory agencies, when considering certain applications involving Patriot, to consider Patriot’s record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA was originally enacted because of concern over unfair treatment of prospective borrowers by banks and unwarranted geographic differences in lending patterns. Existing banks have sought to comply with the CRA in various ways; some banks have made use of more flexible lending criteria for certain types of loans and borrowers (consistent with the requirement to conduct safe and sound operations), while other banks have increased their efforts to make loans to help meet identified credit needs within the consumer community, such as those for home mortgages, home improvements, and small business loans. Compliance may also include participation in various government insured lending programs, such as Federal Housing Administration insured or Veterans Administration guaranteed mortgage loans, Small Business Administration loans, and participation in other types of lending programs such as high loan-to-value ratio conventional mortgage loans with private mortgage insurance. To date, the market area from which the Bank draws much of its business is in the towns and cities in which the Bank has branch offices, which are characterized by a very diverse ethnic, economic and racial cross-section of the population. As the Bank expands further, the market areas served by the Bank will continue to evolve. The Company and the Bank have not and will not adopt any policies or practices, which discourage credit applications from, or unlawfully discriminate against, individuals or segments of the communities served by the Bank.
On October 26, 2001, the United and Strengthening America by Providing Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) was enacted to further strengthen domestic security following the September 11, 2001 attacks. The Patriot Act amended various federal banking laws, particularly the Bank Secrecy Act, with the intent to curtail money laundering and other activities that might be undertaken to finance terrorist actions. The Patriot Act also requires that financial institutions in the U.S. enhance already established anti-money laundering policies, procedures and audit functions, and ensure that controls are reasonably designed to detect instances of money laundering through certain correspondent or private banking accounts. Verification of customer identification, maintenance of said verification records, and cross-checking names of new customers against government lists of known or suspected terrorists is also required. The Patriot Act was reauthorized and modified with the enactment of The USA Patriot Act Improvement and Reauthorization Act of 2005.
The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, in accordance with the Exchange Act, files periodic reports, proxy statements, and other information with the SEC.
On July 20, 2002, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) was enacted, the primary purpose of which is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. Section 404 of Sarbanes-Oxley, entitled Management Assessment of Internal Controls, requires that each annual report include an internal control report which states that it is the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting, as well as an assessment by management of the effectiveness of the internal control structure and procedures for financial reporting. This section further requires that the external auditors attest to, and report on, the Company’s internal controls over financial reporting; although, Smaller Reporting Companies as defined by the SEC are exempt from this requirement. Sarbanes-Oxley contains provisions for the limitations of services that external auditors may provide, as well as requirements for the credentials of members of the Audit Committee of Patriot’s Board of Directors. In addition, Sarbanes-Oxley requires principal executive and principal financial officers to certify to the adequacy of internal controls over financial reporting and to the accuracy of financial information released to the public on a quarterly and annual basis. Specifically, Sarbanes-Oxley requires Patriot’s Chief Executive and Chief Financial officer to certify that, to their best of their knowledge, the financial information reported accurately presents the financial condition and results of operations of the Company and that it contains no untrue statement or omission of material fact. Patriot’s Chief Executive and Chief Financial officer also are required to certify to their responsibility for establishing and maintaining a system of internal controls, the design and implementation of which insures that all material information is made known to these officers or other responsible individuals; this certification also includes the evaluation of the effectiveness of disclosure controls and procedures, and the impact thereof, on the Company’s financial reporting.
Recent Legislative Developments
Many of the provisions of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) are aimed at financial institutions that are significantly larger than Patriot. Notwithstanding this, there are many other provisions that Patriot is subject to and had to comply with since July 21, 2010, including any applicable rules promulgated by the Consumer Financial Protection Bureau (“CFPB”). As rules and regulations are promulgated by the agencies responsible for implementing and enforcing Dodd-Frank, Patriot will have to address them to ensure compliance with such applicable provisions. Management expects the cost of compliance to increase, due to the regulatory burden imposed by Dodd-Frank.
Dodd-Frank also broadened the base for FDIC insurance assessments. Under rules issued by the FDIC in February 2011, the base for insurance assessments changed from domestic deposits to consolidated assets less tangible equity. Assessment rates are calculated using formulas that take into account the risks of the institution being assessed. The rule was effective beginning April 1, 2011 and did not have a material impact on the Company.
Financial reform legislation and the implementation of any rules ultimately issued could have adverse implications on the financial industry, the competitive environment, and the Bank’s ability to conduct business.
In July 2013, the Fed, the FDIC, and the OCC approved final rules establishing a new comprehensive capital framework for U.S. Banking organizations (the “New Capital Rules”). The New Capital Rules generally implemented the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework (referred to as “Basel III”) for strengthening international capital standards. The New Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including Patriot.
In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and Federal Reserve Bank (“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.
Recent Developments with Regulators
In November 2018 the Bank entered into a formal written agreement (the “Agreement”) with the Office of the OCC. The Agreement states the Board and the Bank would develop, implement and revise written documents and policies related to executive compensation, conflict of interest, internal audit, liquidity and asset/liability management, commercial loan administration, leveraged lending, practices relating to the allowance for loan and lease losses, and assumptions used in the Bank’s interest rate risk model. Under the Agreement the Bank agreed to provide a revised written 3-year strategic and capital plan for the Bank. The Bank provided the documents and policies requested in the Agreement and has provided updated documents and policies pursuant to the agreement.
To date, the Bank has addressed each of the items identified in the Agreement and is currently working collaboratively with the OCC to bring all matters to full resolution.
Available Information
The Company’s website address is https://www.bankpatriot.com; however, information found on, or that can be accessed through, the website is not incorporated by reference into this Form 10-K. The Company makes available free of charge on its website (under the links entitled “For Investors”, then “SEC filings”, then “Documents”), its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, information statements on Schedule 14C, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, as soon as practicable after such reports are electronically filed with or furnished to the SEC. Because the Company is an electronic filer, such reports are filed with the SEC and are also available on their website (http://www.sec.gov). The public may also read and copy any materials filed with the SEC at the SEC’s Public Reference Room, 100 F Street, N.E. Room 1580, Washington, DC 20549. Information about the Public Reference Room can be obtained by calling 1-800-551-8090 or SEC Investor Information Service 1-800-SEC-0330.

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ITEM 1A. RISK FACTORS
ITEM 1A. Risk Factors
Patriot’s financial condition and results of operation are subject to various risks inherent to its business, including those noted below.
The risks involved in the Bank’s commercial real estate loan portfolio are material.
The Bank’s commercial real estate loan portfolio constitutes a material portion of its assets and generally has different risks than residential mortgage loans. Commercial real estate loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers as compared to single-family residential loans.
Because the repayment of commercial real estate loans depends on the successful management and operation of the borrower’s properties or related businesses, repayments of such loans can be affected by adverse conditions in the real estate market or local economy. A downturn in the real estate market within the Bank’s market area may adversely impact the value of properties securing these loans. These risks are partially offset by shorter terms, reduced loan-to-value ratios, and guarantor support of the borrower.
Real estate lending in the Bank’s core market involves risks related to a decline in value of commercial and residential real estate.
The market value of real estate can fluctuate significantly in a relatively short period of time, as a result of market conditions in the geographic area in which real estate is located. A significant portion of the Bank’s total loan portfolio is secured by real estate located in Fairfield County, Connecticut and Westchester County, New York, areas historically of high affluence that had been materially impacted by the financial troubles experienced by large financial service companies on Wall Street and other companies during the financial crisis as well as the changes in tax laws.
Since then, credit markets have become tighter and underwriting standards more stringent and the inability of purchasers of real estate to obtain financing could continue to impact the real estate market. Therefore, these loans may be subject to changes in grade, classification, accrual status, foreclosure, or loss, which could have an effect on the adequacy of the allowance for loan and lease losses.
The Bank’s business is subject to various lending and other economic risks that could adversely impact its results of operations and financial condition.
Changes in economic conditions, particularly a continued economic slowdown in Fairfield County, Connecticut and the New York metropolitan area could result in the following consequences, any of which may have a material detrimental effect on the Bank’s business:
●
Increases in:
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Loan delinquencies;
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Problem assets and foreclosures; or
●
Decreases in:
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Demand for the Bank’s products and services;
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Customer borrowing power that is caused by declines in the value of assets and/or collateral supporting the Bank’s loans, especially real estate.
During the years 2007 through 2009, the general economic conditions and specific business conditions in the United States, including Fairfield County, Connecticut and the New York metropolitan area deteriorated, resulting in increases in loan delinquencies, problem assets and foreclosures, and declines in the value and collateral associated with the Bank’s loans.
During 2010 through 2020, however, the economic climate improved, contributing to decreases in the Bank’s problem assets, delinquencies and foreclosures from the levels experienced in the earlier period of economic turbulence. The Company is unable to predict, however, future economic conditions and their impact on the Company’s business.
The Bank’s allowance for loan and lease losses may not be adequate to cover actual losses.
Like all financial institutions, the Bank maintains an allowance for loan and lease losses to provide for loan defaults and non-performance. The allowance for loan and lease losses is based on an evaluation of the risks associated with the Bank’s loans receivable, as well as the Bank’s prior loss experience. Deterioration in general economic conditions and unforeseen risks affecting customers could have an adverse effect on borrowers’ capacity to timely repay their obligations before risk grades could reflect those changing conditions. Maintaining the adequacy of the Bank’s allowance for loan and lease losses may require that the Bank make significant and unanticipated increases in the provision for loan losses, which would materially affect the results of operations and capital adequacy. The amount of future losses is susceptible to changes in economic, operating, and other conditions including changes in interest rates that may be beyond the Bank’s control and which losses may exceed current allowance estimates. Although the current economic environment has improved, conditions remain uncertain and may result in additional risk of loan losses.
Federal regulatory agencies, as an integral part of their examination process, review the Bank’s loan portfolio and assess the adequacy of the allowance for loan and lease losses. The regulatory agencies may require the Bank to change classifications or grades on loans, increase the allowance for loan and lease losses by recognizing additional loan loss provisions, or to recognize further loan charge-offs based upon their judgments, which may differ from the Bank’s. Any increase in the allowance for loan and lease losses required by these regulatory agencies could have a negative effect on the Bank’s results of operations and financial condition. While management believes that the allowance for loan and lease losses is currently adequate to cover inherent losses, further loan deterioration could occur, and therefore, management cannot assure shareholders that there will not be a need to increase the allowance for loan and lease losses, or that the regulators will not require management to increase this allowance. Either of these occurrences could materially and adversely affect Patriot’s earnings and profitability.
Patriot is subject to certain risks with respect to liquidity.
"Liquidity" refers to Patriot’s ability to generate sufficient cash flows to support its operations and fulfill its obligations, including commitments by the Bank to originate loans, to repay its wholesale borrowings and other liabilities, and to satisfy the withdrawal of deposits by its customers.
Patriot’s primary sources of liquidity are the deposits the Bank acquires organically through its branch network and through the brokered deposit market, borrowed funds, primarily in the form of collateralized borrowings from the Federal Home Loan Bank, and the cash flows generated through the collection of loan payments and on mortgage-related securities. In addition, depending on current market conditions, Patriot may have the ability to access the capital markets.
Deposit flows, calls of investment securities and wholesale borrowings, and prepayments of loans and mortgage-related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived; local and national economic conditions; and competition for deposits and loans in the markets served. Furthermore, changes to the underwriting guidelines for wholesale borrowings, or lending policies may limit or restrict Patriot’s ability to borrow, and could therefore have a significant adverse impact on its liquidity. A decline in available funding could adversely impact Patriot’s ability to originate loans, invest in securities, and meet its expenses, or to fulfill such obligations as repaying its borrowings or meeting deposit withdrawal demands.
The Bank’s business is subject to interest rate risk and variations in interest rates may negatively affect the Bank’s financial performance.
Patriot is unable to predict, with any degree of certainty, fluctuations of market interest rates, which are affected by many factors including inflation, recession, a rise in unemployment, a tightening money supply, domestic and international disorder, and instability in domestic and foreign financial markets. Changes in the interest rate environment may reduce Patriot’s profits. Patriot realizes income from the differential or “spread” between the interest earned on loans, securities, and other interest-earning assets and interest paid on deposits, borrowings, and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, an increase in the general level of interest rates may adversely affect the ability of some borrowers to pay the interest on and principal of their obligations. Although Patriot has implemented strategies which are designed to reduce the potential effects of changes in interest rates on operations, these strategies may not always be successful. Accordingly, changes in levels of market interest rates could materially and adversely affect Patriot’s net interest spread, asset quality, levels of prepayments, and cash flow, as well as the market value of its securities portfolio and overall profitability.
Patriot’s investment portfolio includes securities that are sensitive to interest rates and variations in interest rates may adversely impact Patriot’s profitability.
Patriot’s security portfolio is classified as available-for-sale and is comprised primarily of corporate debt and mortgage-backed securities, which are insured or guaranteed by the U.S. Government. These securities are sensitive to interest rate fluctuations. Unrealized gains or losses in the available-for-sale portfolio of securities are reported as a separate component of shareholders’ equity. As a result, future interest rate fluctuations may impact shareholders’ equity, causing material fluctuations from quarter to quarter. The inability to hold its securities until market conditions are favorable for a sale, or until payments are received on mortgage-backed securities, could adversely affect Patriot’s earnings and profitability.
Patriot is dependent on its locally-based management team and the loss of its senior executive officers or other key employees could impair its relationship with its customers and adversely affect its business and financial results.
The Bank’s success is dependent upon the continued services and skills of its long-term locally-based management team. The unexpected loss of services of one or more of these key personnel, because of their skills, knowledge of the Bank’s market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel could have an adverse impact on the Bank’s business.
Patriot’s success also depends, in part, on its continued ability to attract and retain experienced commercial lenders and retail bankers, as well as other management personnel. The loss of services of several such key personnel could adversely affect Patriot’s growth and prospects, to the extent replacement personnel are not able to be identified and promptly retained. Competition for commercial lenders and retail bankers is strong, and Patriot may not be successful in retaining or attracting such personnel.
Natural disasters, acts of war or terrorism, the impact of health epidemics and other adverse external events could detrimentally affect our financial condition and results of operations.
Natural disasters, acts of war or terrorism, and other adverse external events could have a significant negative impact on our ability to conduct business or upon third parties who perform operational services for us or our customers. Such events also could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue or cause us to incur additional expenses.
The outbreak of COVID-19 in March 2020, has negatively impacted the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to a coronavirus outbreak in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. In the event of a natural disaster, the spread of the coronavirus to our market areas or other adverse external events, our business, services, asset quality, financial condition and results of operations could be adversely affected.
Patriot is subject to certain general affirmative debt covenants, which if it cannot comply, may result in default and actions taken against it by its debt holders.
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 pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder. Proceeds of $7.8 million were directly contributed to the Bank. The subordinated debt qualifies for Tier 2 Capital of the Company and the funds contributed to the Bank qualify as Tier 1 capital at the Bank.
In December 2016, the Company issued $12 million of senior notes (the “Senior Notes”) that contain certain affirmative covenants, which 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. The Senior Notes are unsecured, rank equally with all other senior obligations of the Company, are not redeemable nor may they be put to the Company by the holders of the notes, and require no payment of principal until maturity date of December 22, 2021.
The affirmative covenants contained in the Senior Note agreements are of a general nature and not uncommon in such debt agreements. Management does not anticipate an inability to maintain its compliance with the affirmative covenants contained in the Senior Notes as such compliance is inherent in the Bank’s continued operation and Patriot’s public company status, as well as management’s overall strategic plan.
A breach of information security could negatively affect Patriot’s earnings.
Patriot increasingly depends upon data processing, communications, and information exchange on a variety of computing platforms and networks, and the internet to conduct its business. Patriot cannot be certain that all of its systems are entirely free from vulnerability to attack, despite safeguards it has instituted. In addition, Patriot relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached, information can be lost or misappropriated and could result in financial loss or costs to Patriot, or damages to others. These financial losses or costs could materially exceed the amount of Patriot’s insurance coverage, if applicable, which would have an adverse effect on its results of operations and financial condition. In addition, the Bank’s reputation could suffer if its database were breached, which could materially affect Patriot’s financial condition and results of operations.
The Bank is subject to environmental liability risk associated with its lending activities.
A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on, and take title to, properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties, which may make Patriot liable for remediation costs, as well as for personal injury and property damage. In addition, Patriot owns and operates certain properties that may be subject to similar environmental liability risks.
Environmental laws may require the Bank to incur substantial expense and may materially reduce the affected property's value, or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures requiring the performance of an environmental site assessment before loan approval or initiating any foreclosure action on real property, these assessments may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on Patriot’s financial condition and results of operations.
The Company relies on the dividends and return of capital it receives from its subsidiary.
The Company is a separate and distinct legal entity from the Bank. The Company’s primary source of revenue is the dividends or other returns of capital it receives from the Bank, which the Company uses to fund its activities, meet its obligations, and remit dividends to its shareholders. Various federal and state laws and regulations limit the amount of dividends or other returns of capital that a bank may pay to its parent company. In addition, the Company’s right to participate in a distribution of assets, upon liquidation or reorganization of the Bank or another regulated subsidiary, may be subordinate to claims by the Bank’s or subsidiary's creditors. If the Bank were to be restricted from making payments to the Company, the Company’s ability to fund its activities, meet its obligations, or pay dividends to its shareholders might be curtailed. The inability to receive payments from the Bank could therefore have a material adverse effect on the Company.
Per agreement with Bank regulators, dividends and return of capital from the Bank to the Holding Company are subject to prior approval from the OCC, and dividends from the Company to third parties are also subject to prior approval from FRB. There is no assurance that Company will pay dividends in the future.
The price of the Company’s common stock may fluctuate.
The market price of the Company’s common stock could be subject to significant fluctuations due to changes in sentiment in the market regarding the Company’s operations or business prospects. Among other factors, the Company’s stock price may be affected by:
●
Operating results that vary from the expectations of securities analysts and investors;
●
Developments in its business or in the financial services sector in-general;
●
Regulatory or legislative changes affecting its business or the financial services sector in-general;
●
Operating results or securities price performance of companies that investors consider being comparable to the Company;
●
Changes in estimates or recommendations by securities analysts or rating agencies;
●
Announcements of strategic developments, acquisitions, dispositions, financings, and other material events by the Company or the Company’s competitors; and
●
Changes or volatility in global financial markets and economies, general market conditions, interest or foreign exchange rates, stock, commodity, credit, or asset valuations.
Difficult market conditions have adversely affected the Company’s industry.
The Company is exposed to general downturns in the U.S. economy, and particularly downturns in the local Connecticut and New York markets in which it operates. Two significant impacts resulting from the financial crisis included the housing market suffering falling home prices leading to increased foreclosures and our customer base experiencing rampant unemployment and sustained under-employment. These conditions negatively impacted the credit performance of mortgage and construction loans, and resulted in significant asset-value write-downs by financial institutions, including government-sponsored enterprises, as well as major commercial and investment banks. The loss of mortgage and construction loan asset-value caused many financial institutions to seek additional capital, to merge with larger and financially stronger financial institutions and, in some cases, to fail. Many lenders and institutional investors reduced or ceased providing funding to borrowers, including other financial institutions. This market turmoil, and the tightening of credit by the Fed, led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and generally widespread reductions in business activity. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected the Company’s business, financial condition, and results of operations. A worsening of these conditions would likely exacerbate the adverse effects these difficult market conditions have had on the Company and other financial institutions. In particular:
●
Less than optimal economic conditions may continue to affect market confidence levels and may cause adverse changes in payment patterns, thereby causing increased delinquencies, which could affect the Bank’s provision for loan losses and charge-off of loans receivable.
●
The ability to assess the creditworthiness of the Bank’s customers, or to accurately estimate loan collateral value, may be impaired if the models and approaches the Bank uses becomes less predictive of future behaviors, valuations, assumptions, or estimates due to the unpredictable economic climate.
●
Increasing consolidation of financial services companies, as a result of current market conditions, could have unexpected adverse effects on the Bank’s ability to compete effectively.
The Bank may be required to pay significantly higher FDIC premiums, special assessments, or taxes that could adversely affect its earnings.
Market developments have significantly impacted the insurance fund of the FDIC. As a result, the Bank may be required to pay higher premiums, or special assessments, that could adversely affect earnings. The amount of premiums the FDIC requires for the insurance coverage it provides is outside the Bank’s control. If there are additional banks or financial institution failures, the Bank may be required to pay higher FDIC premiums than are currently assessed. Increases in FDIC insurance premiums, including any future increases or required prepayments, may materially adversely affect the Bank’s results of operations.
Patriot is subject to risks associated with taxation.
The amount of income taxes Patriot is required to pay on its earnings is based on federal and state legislation and regulations. Patriot provides for current and deferred taxes in its financial statements, based on the results of operations, business activity, legal structure, interpretation of tax statutes, assessment of risk of adjustment upon audit, and application of financial accounting standards. Patriot may take tax return filing positions for which the final determination of tax is uncertain. Patriot’s net income or loss and the related amount per share may be reduced, if a federal, state, or local tax authority assesses additional taxes, penalties, or interest that has not been provided for in the consolidated financial statements. Patriot’s equity position and net income or loss can also be reduced if all or apportion of its deferred tax assets are deemed to be unrealizable and require a valuation allowance. There can be no assurance that Patriot will achieve its anticipated effective tax rate, due to a change in a tax law, or the result of a tax audit that disallows previously recognized tax benefits.
Risks associated with changes in technology.
Financial products and services have become increasingly technology-driven. The Bank’s ability to compete for new and meet the needs of existing customers, in a cost-efficient manner, is dependent on its ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of the Bank’s competitors have greater resources to invest in technology and may be better equipped to market new technology-driven products and services. Failing to keep pace with technological change could have a material adverse impact on the Bank’s business and therefore on Patriot’s financial condition and results of operations.
Strong competition in Patriot’s geographical market could limit growth and profitability.
Competition in the banking and financial services industry is intense. Fairfield County, Connecticut and the New York City metropolitan areas have a high concentration of financial institutions including large money center and regional banks, community banks, and credit unions. Some of Patriot’s competitors offer products and services that the Bank currently does not offer, such as private banking and trust services. Many of these competitors have substantially greater resources and lending limits than the Bank, and may offer certain services that Patriot does not or cannot provide. Price competition might result in the Bank earning less on its loans and paying more for deposits, which would reduce net interest income. Patriot expects competition to increase in the future, as a result of legislative, regulatory and technological changes. Patriot’s profitability depends upon its continued ability to successfully compete in its geographical market.
Government regulation may have an adverse effect on Patriot’s profitability and growth.
Patriot is subject to extensive regulation, supervision, and examination by the OCC as the Bank’s chartering authority, the FDIC as the insurer of its deposits, and the Fed as its primary regulator. Changes in federal and state banking laws and regulations, or in federal monetary policies, could adversely affect the Bank’s profitability and continued growth. Legislative and regulatory changes are expected, but cannot be predicted. For example, new legislation or regulation could limit the manner in which Patriot may conduct its business, including the Bank’s ability to obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads. The laws, regulations, interpretations, and enforcement policies that apply to Patriot have been subject to significant, and sometimes retroactively applied, changes in recent years, and are likely to change significantly in the future.
Legislation enacted by the U.S. Congress, proposing significant structural reforms to the financial services industry, has, among other things, created the CFPB, which is given broad authority to regulate financial service providers and financial products. In addition, the Fed has passed guidance on incentive compensation at financial institutions it regulates and the United States Department of the Treasury and federal banking regulators have issued statements calling for higher capital and liquidity requirements. Complying with any new legislative or regulatory requirements and any programs established thereunder by federal and state governments, could have an adverse impact on Patriot’s operations and the results thereof.
Changing regulation of corporate governance and public disclosure.
Patriot is subject to laws, regulations, and standards relating to corporate governance and public disclosure, SEC rules and regulations, and NASDAQ rules. These laws, regulations, and standards are subject to varying interpretations, and as a result, their practical application may evolve over time as new guidance is provided by regulatory and governing bodies. Due to the evolving legal and regulatory environment, compliance may become more difficult and result in higher costs. Patriot is committed to maintaining high standards of corporate governance and public disclosure. As a result, Patriot’s efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. Patriot’s reputation may be harmed, if it does not continue to comply with these laws, regulations and standards.
The earnings of financial institutions are significantly affected by general business and economic conditions.
As a financial institution, Patriot’s operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short- and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, and the overall strength of the U.S. economy and the local economies in which it operates, all of which conditions are beyond Patriot’s control. In recent years, the financial services industry has experienced unprecedented upheaval, including the failure of some of the World’s leading financial institutions. Further deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values, and a decrease in demand for the Bank’s products and services, among other things, any of which could have a material adverse impact on Patriot’s results of operations and financial condition. Patriot cannot currently predict or implement plans to mitigate the effects of unknown future industry developments.
The Company is a “Controlled Company” within the meaning of the NASDAQ U.S. Market Rules and Regulations and, as a result, the Company qualifies for, and relies on, exemptions from certain corporate governance requirements.
Holdings controls a majority of the Company’s voting common stock. As a result, the Company is a “Controlled Company” within the meaning of Nasdaq corporate governance standards. Under the Nasdaq Rules and Regulations, a company of which more than 50% of the voting power is held by an individual, group or another company is considered a “Controlled Company”, which may utilize exemptions relating to certain Nasdaq corporate governance requirements, including:
●
Requiring the Board of Directors to be comprised of a majority of Independent Directors (as defined);
●
The requirement that the Company have a Nominating and Governance Committee that is composed entirely of independent directors;
●
The requirement that the Company have a Compensation Committee that is composed entirely of independent directors; and
●
The requirement for an annual review and reassess the adequacy of the formal written charter Compensation Committee.
As a result of these exemptions, the Company does have an annual review and reassess the adequacy of the formal written charter of the Compensation Committee and may elect to rely on other exemptions. Accordingly, a holder of its common stock will not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.
The outbreak has adversely impacted and is likely to further adversely impact our operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:
●
credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well;
●
declines in collateral values;
●
third party disruptions, including outages at network providers and other suppliers;
●
increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and
●
operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.
The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Coronavirus Aid, Relief, and Economic Security Act
In response to the COVID-19 pandemic, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, 2020. Among other things, the CARES Act included the following provisions impacting financial institutions:
Legal Lending Limit Waiver. The CARES Act permits the OCC to waive legal lending limits to any particular borrower (i) with respect to loans to non-bank financial companies or (ii) upon a finding by the OCC that such exemption is in the public interest, with respect to any other borrower, in each case until the earlier of the termination date of the national emergency or December 31, 2020.
Community Bank Leverage Ratio. The CARES Act directs federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.
Temporary Troubled Debt Restructurings (“TDRs”) Relief. The CARES Act allows banks to elect to suspend requirements under U.S. GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a TDR, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. Federal banking agencies are required to defer to the determination of the banks making such suspension. In addition, on April 7, 2020, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs.
Small Business Administration Paycheck Protection Program. The CARES Act created the SBA’s Paycheck Protection Program. Under the Paycheck Protection Program, $669 billion was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions that process loan applications and service the loans. The Bank started participating in the SBA’s Paycheck Protection Program in January 2021.
The Fed has taken, and continues to take, steps to support markets and the economy. Stimulus from Washington and the federal government, in spite of political hurdles and a change in presidential administrations, has also provided meaningful support. The new Biden administration has proposed another $1.9 trillion stimulus package that is currently making its way through Congress. The market expects the Fed Funds rate to remain at the effective lower bound near zero for an extended period of time. Henceforth, the Fed appears to be willing to let inflation run above the 2% target level, even when unemployment is very low, before removing accommodation.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
ITEM 2. Properties
The following table summarizes Patriot’s owned and leased properties, as of December 31, 2020:
Street Address
City
County
State
Owned:
233 Post Road
Darien
Fairfield
Connecticut
1755 Black Rock Turnpike
Fairfield
Fairfield
Connecticut
100 Mason Street
Greenwich
Fairfield
Connecticut
900 Bedford Street
Stamford
Fairfield
Connecticut
999 Bedford Street
Stamford
Fairfield
Connecticut
771 Boston Post Road
Milford
New Haven
Connecticut
50 Charles Street
Westport
Fairfield
Connecticut
50 Church Street
New Haven
New Haven
Connecticut
Leased:
16 River Street
Norwalk
Fairfield
Connecticut
415 Post Road East
Westport
Fairfield
Connecticut
495 Central Park Avenue
Scarsdale
Westchester
New York
7 Old Tavern Road
Orange
New Haven
Connecticut
30 Oak Street
Stamford
Fairfield
Connecticut
300 Centerville Rd
Warwick
Kent County
Rhode Island
At December 31, 2020, five branch buildings were owned and four branch facilities were leased. Additionally, the Bank maintains certain operating and administrative service facilities and additional parking at its main branch banking office, which is subject to ten non-cancelable operating lease agreements. Patriot’s lease agreements have terms ranging from one year to fifteen years with eleven years and seven months remaining on the longest lease term. Generally, Patriot’s lease agreements contain rent escalation clauses, and renewals for one or more periods at the Bank’s option.
On May 10, 2018, the Bank completed its acquisition of Prime Bank. The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut.
On February 28, 2018, the Bedford branch was closed, and its business and staff transferred to the Scarsdale branch.
At three of its branch buildings, the Bank has excess space that it leases to seven unrelated parties.
For additional information, see the Leases footnote disclosure in the consolidated financial statements included herein.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. Legal Proceedings
Other than ordinary routine litigation incidental to its business, neither the Company nor the Bank has any pending legal proceedings to which the Company or the Bank is a party or any of its property is subject.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s Common Stock is traded on the Nasdaq Global Market under the Symbol “PNBK.”
Holders
There were approximately 277 shareholders of record of the Company’s Common Stock as of December 31, 2020. This number does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms or other nominees.
Dividends
The Company’s ability to pay dividends is dependent on the Bank’s ability to pay dividends or execute a return of capital to the Company. The Bank can make payments to the Company pursuant to a dividend policy requiring compliance with the Bank's OCC-approved capital program, in compliance with applicable law, and with the prior written determination of no supervisory objection by the Assistant Deputy Comptroller. In addition to the capital program, certain other restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of the OCC is required to make payments in excess of the Bank’s earnings retained in the current year plus retained net earnings for the preceding two years. The Company is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements. OCC regulations impose limitations upon all capital distributions by commercial institutions, like the Bank, such as dividends, returns of capital, and payments to repurchase or otherwise acquire shares. The Company may not declare or pay cash dividends on or repurchase any of its shares of common stock, if the effect thereof would cause stockholders’ equity to be reduced below applicable regulatory capital maintenance requirements, or if such declaration and payments would otherwise violate regulatory requirements.
The Company did not pay any dividends in 2020 and has temporarily suspended dividend payments pending resolution of the economic uncertainties associated with the Coronavirus pandemic. For the year ended December 31, 2019 and 2018, the Company paid cash dividends of $.01 per share of common stock, or an aggregate of $155,000 and $154,000, respectively. There is no assurance that Company will pay dividends in the future.
Recent Sales of Unregistered Securities
No sales of unregistered securities were entered in 2020 and 2019.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Performance Graph
The performance graph compares the Company’s cumulative total shareholder return on its common stock over the last five fiscal years to the NASDAQ Community Bank Total Return Index and the S&P 500 Total Return Index. Total shareholder return is measured by dividing the sum of the cumulative amount of dividends for the measurement period (assuming dividend reinvestment) and the Company’s share price at the end of the measurement period, by the share price at the beginning of the measurement period.
Period Ending
Patriot National Bancorp ("PNBK")
100.00 %
96.56 %
122.68 %
97.94 %
87.70 %
68.32 %
Nasdaq Community Bank Index Total Return Index ("XABQ")
100.00 %
135.02 %
139.77 %
114.74 %
139.10 %
124.31 %
S&P 500 Total Return Index ("SP500TR")
100.00 %
111.96 %
136.40 %
130.42 %
171.49 %
203.04 %

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. Selected Financial Data
(In thousands, except per share data)
As of and for the year ended December 31,
Balance Sheet Data:
Cash and due from banks
$ 34,636
$ 39,404
$ 66,437
$ 48,729
$ 92,289
Investment securities
53,712
52,767
52,253
38,929
36,596
Loans, net
719,596
802,049
772,767
713,350
576,982
Total assets
880,729
979,836
951,696
852,080
756,654
Total deposits
685,656
769,535
743,281
637,439
529,324
Total borrowings
120,813
130,900
130,983
141,369
159,476
Total shareholders' equity
63,219
66,994
69,340
66,749
62,570
Operating Data:
Interest and dividend income
$ 37,903
$ 43,644
$ 40,375
$ 32,849
$ 25,408
Interest expense
13,750
18,218
12,378
6,956
3,008
Net interest income
24,153
25,426
27,997
25,893
22,400
Provision (credit) for loan losses
2,170
4,971
1,303
(857 )
2,464
Non-interest income
1,979
2,483
1,627
1,444
1,556
Non-interest expense
28,118
26,654
24,235
21,172
18,355
(Benefit) provision for income taxes
(337 )
(899 )
2,875
1,207
Net (loss) income
$ (3,819 )
$ (2,817 )
$ 3,196
$ 4,147
$ 1,930
Per Share Data:
Basic (loss) income per share
$ (0.97 )
$ (0.72 )
$ 0.82
$ 1.06
$ 0.49
Diluted (loss) income per share
$ (0.97 )
$ (0.72 )
$ 0.82
$ 1.06
$ 0.49
Selected Ratios:
Return on average assets
(0.40 )%
(0.29 )%
0.35 %
0.54 %
0.30 %
Return on average equity
(5.82 )%
(4.05 )%
4.64 %
6.32 %
3.08 %
Average equity to average assets
6.86 %
7.18 %
7.63 %
8.48 %
9.83 %

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. Management’s Discussion and Analysis - Financial Condition & Results of Operations
General
Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.
Critical Accounting Policies
The accounting and reporting policies of Patriot conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the financial services industry. A summary of Patriot’s significant accounting policies is included in the Notes to consolidated financial statements that are referenced in Item 8. Financial Statements and Supplementary Data. Although all of Patriot’s policies are integral to understanding its consolidated financial statements, certain accounting policies involve management to exercise judgment, develop assumptions, and make estimates that may have a material impact on the financial information presented in the consolidated financial statements or Notes thereto. The assumptions and estimates are based on historical experience and other factors representing the best available information to management as of the date of the consolidated financial statements, up to and including the date of issuance or availability for issuance. As the basis for the assumptions and estimates incorporated in the consolidated financial statements may change, as new information comes to light, the consolidated financial statements could reflect different assumptions and estimates.
Due to the judgments, assumptions, and estimates inherent in the following policies, management considers such accounting policies critical to an understanding of the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
Allowance for Loan and Lease Losses (ALLL)
The Company maintains an ALLL at a level management believes is sufficient to absorb estimated credit losses incurred as of the report date. Management’s determination of the adequacy of the ALLL is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires significant estimates by management. As applicable, consideration is given to a variety of factors in establishing these estimates including historical losses, peer and industry data, current economic conditions, the size and composition of the loan portfolio, delinquency statistics, criticized and classified assets and impaired loans, results of internal loan reviews, borrowers’ perceived financial and management strengths, the adequacy of underlying collateral, the dependence on collateral, and the strength of the present value of future cash flows and other relevant factors. These factors may be susceptible to significant change.
To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required, which may adversely affect the Company’s results of operations in the future. Subsequent to acquisition of purchased-credit-impaired loans, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. Subsequent decreases in expected cash flows will generally result in a provision for loan losses; subsequent increases in expected cash flows may result in a reversal of the provision for loan losses to the extent of prior charges.
Unrealized Gains and Losses on Securities Available-for-sale
The Company receives estimated fair values of debt securities from independent valuation services and brokers. In developing these fair values, the valuation services and brokers use estimates of cash flows based on historical performance of similar instruments in similar rate environments. Available-for-sale debt securities consist primarily of mortgage-backed securities that are guaranteed by the U.S. government. The Company uses various indicators in determining whether a security is other-than-temporarily impaired including, for debt securities, when it is probable that the contractual interest and principal will not be collected, or for equity securities, whether the market value is below its cost for an extended period of time with low expectation of recovery. The debt securities are monitored for changes in credit ratings because adverse changes in credit ratings could indicate a change in the estimated cash flows of the underlying collateral or issuer. The Company also considers the volatility of a security’s price in comparison to the market as a whole and any recoveries or declines in fair value subsequent to the balance sheet date. If management determines that the impairment is other-than-temporary, the entire amount of the impairment, as of the balance sheet date, is recognized in earnings, even if the decision to sell the security has not been made.
The fair value of the security becomes the new amortized cost basis of the investment and is not adjusted for subsequent recoveries in fair value. Available-for-sale debt securities were not considered to be other-than-temporarily impaired as of December 31, 2020, 2019, or 2018 because the unrealized losses were related to changes in interest rates and did not affect the expected cash flows to be received, or indicate a loss of value on the underlying collateral, or a loss of financial stability on the part of the issuer. Management concluded that the declines in fair value of the investment portfolio as of the reporting dates is temporary and that values would recover by way of increases in market price or positive changes in market interest rates.
Deferred Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statements of operations in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value.
Intangible assets, other than goodwill and indefinite-lived intangible assets, are amortized to expense over their estimated useful lives in a manner consistent with that in which the related benefits are expected to be realized, and are periodically reviewed by management to assess recoverability. Impairment losses on other intangibles are recognized as a charge to expense if carrying amounts exceed fair values.
Servicing Assets
A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The servicing asset is recorded on the balance sheet and included in other assets. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term. Any impairment, if temporary, would be reported as a valuation allowance.
Derivatives
The Company enters into interest rate swap agreements (“swaps”), to provide a facility to mitigate for the borrower the fluctuations in the variable rate on the respective loan. The customer swaps are simultaneously hedge by offsetting derivatives that Patriot entered into with an outside third party. The swaps are reported at fair value in other assets or other liabilities. Patriot’s swaps qualify as derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income.
FINANCIAL CONDITION
Assets
The Company’s total assets decreased $99.1 million, or 10.1%, from $979.8 million at December 31, 2019 to $880.7 million at December 31, 2020. The decline in total assets represents the intentional downsizing of the Bank’s balance sheet as the current economic uncertainties associated with the COVID-19 pandemic are assessed.
Cash and cash equivalents
Cash and cash equivalents have decreased $4.8 million or 12.2%, from $39.4 million at December 31, 2019 to $34.6 million as of December 31, 2020. The decrease as of December 31, 2020 was primarily attributable to net decrease in loan portfolio through paydown of the loans and net decrease in deposits - both of which are currently invested in short term cash positions. The Company’s liquidity position is strong with liquid assets rising to 9.0% of total assets as of December 31, 2020.
Investment securities
The following table is a summary of the Company’s available-for-sale securities portfolio and other investments at the dates shown:
(In thousands)
December 31,
U. S. Government agency mortgage-backed securities
$ 16,833
$ 16,685
$ 20,473
Corporate bonds
17,290
17,313
12,974
Subordinated notes
9,005
9,204
4,564
SBA loan pools
5,567
5,115
-
Municipal bonds
-
-
U.S. Treasury notes
-
-
1,485
Total Available-for-Sale Securities, at fair value
49,262
48,317
39,496
Other Investments, at cost
4,450
4,450
4,963
$ 53,712
$ 52,767
$ 44,459
Total investments increased $945,000 or 1.8%, from $52.8 million at December 31, 2019 to $53.7 million at December 31, 2020. This increase was primarily attributable to the purchases of $9.0 million U.S. Government agency mortgage-backed securities, $1.6 million SBA loan pools and $565,000 municipal bonds, which was offset by $9.9 million in repayments of principal on available-for-sale securities. There were no sales of available-for-sales securities during the year ended December 31, 2020.
Loans held for investment
The following table provides the composition of the Company’s loan held for investment portfolio as of December 31, for each of the years shown:
December 31,
(In thousands)
Amount
%
Amount
%
Amount
%
Loan portfolio segment:
Commercial Real Estate
$ 282,378
38.68 %
$ 314,414
38.71 %
$ 274,938
35.23 %
Residential Real Estate
153,851
21.07 %
175,489
21.61 %
157,300
20.16 %
Commercial and Industrial
144,297
19.76 %
173,875
21.41 %
191,852
24.58 %
Consumer and Other
67,635
9.26 %
85,934
10.58 %
94,569
12.12 %
Construction
66,984
9.17 %
48,388
5.96 %
46,040
5.90 %
Construction to permanent - CRE
15,035
2.06 %
14,064
1.73 %
15,677
2.01 %
Loans receivable, gross
730,180
100.00 %
812,164
100.00 %
780,376
100.00 %
Allowance for loan losses
(10,584 )
(10,115 )
(7,609 )
Loans receivable, net
$ 719,596
$ 802,049
$ 772,767
The gross loans receivable decreased $82.0 million or 10.1%, from $812.2 million at December 31, 2019 to $730.2 million at December 31, 2020. The decrease in loans was primarily attributable to $116.6 million net paydown of the loans which was partially offset by internal loan originations, $32.8 million in purchases of loans receivable and $9.5 million transfer of SBA loans held for sale to loans held for investment during 2020.
Patriot originates SBA 7(a) loans, on which the SBA has historically provided guarantees of 75 percent of the principal balance. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the unguaranteed portion held in the portfolio as a loan held for investment.
SBA loans held for investment were included in the commercial real estate loans and commercial and industrial loan classifications above. As of December 31, 2020 and 2019, SBA loans included in the commercial real estate loans were $5.7 million and $4.0 million, respectively. SBA loans included in the commercial and industrial loan were $15.9 million and $5.6 million as of December 31, 2020 and 2019, respectively.
At December 31, 2020, the net loan to deposit ratio was 105% and the net loan to total assets ratio was 82%. At December 31, 2019, these ratios were 104% and 82%, respectively.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents loans receivable, gross by portfolio segment, by contractual maturity as of December 31, 2020:
Contractual Maturity of Loan Balance
(In thousands)
One year
or less
One
through
Five Years
After
Five Years
Total
Loan portfolio segment:
Commercial Real Estate
$ 44,000
$ 60,807
$ 177,571
$ 282,378
Residential Real Estate
3,651
4,121
146,079
153,851
Commercial and Industrial
31,440
72,543
40,314
144,297
Consumer and Other
1,065
3,640
62,930
67,635
Construction
55,795
10,997
66,984
Construction to permanent - CRE
-
14,311
15,035
Total
$ 135,951
$ 152,832
$ 441,397
$ 730,180
Fixed rate loans
$ 15,881
$ 38,385
$ 121,143
$ 175,409
Variable rate loans
120,070
114,447
320,254
554,771
Total
$ 135,951
$ 152,832
$ 441,397
$ 730,180
All variable rate loans account for 76.0% of the total loan portfolio. Approximately 39.6% of the loan portfolio is variable rate and reprices with changes in interest rates within three months of the rate change. The balance of the loan portfolio is either fixed rate or variable over a longer period of rate change (for example, adjustable-rate mortgage loans are generally fixed for 3-5 years and then reprice annually after the fixed period). These repricing characteristics are reflected in the Bank’s aggregate analysis of net interest sensitivity included in Item 7A. of this report.
As a community bank, the Bank is invested in a local economy, which may be subject to the vagaries of general economic conditions. The existing conditions have led an investment in the loan portfolio weighted to Commercial Real Estate and Commercial and Industrial, which accounts for 58.4% of total loans receivable. These loans generally are collateralized by the underlying real estate and supported by personal guarantees of the borrowers.
Allowance for loan and lease losses
The allowance for loan and lease losses increased $469,000 from $10.1 million at December 31, 2019 to $10.6 million at December 31, 2020. The increase was primarily attributable to a provision for loan losses of $2.2 million and an additional reserve related to the COVID-19 pandemic for the year ended December 31, 2020, which was partially offset by $1.8 million charge-offs.
Based upon the overall assessment and evaluation of the loan portfolio at December 31, 2020, management believes the allowance for loan and lease losses of $10.6 million, which represents 1.45% of gross loans outstanding, was adequate under prevailing economic conditions to absorb existing losses in the loan portfolio.
The following table provides detail of activity in the allowance for loan and lease losses:
Year ended December 31,
(In thousands)
Balance at beginning of the period
$ 10,115
$ 7,609
$ 6,297
Charge-offs:
Commercial Real Estate
(1,032 )
-
-
Residential Real Estate
(24 )
(118 )
(2 )
Commercial and Industrial
(677 )
(2,418 )
-
Consumer and Other
(45 )
(123 )
(33 )
Total charge-offs
(1,778 )
(2,659 )
(35 )
Recoveries:
Commercial Real Estate
-
Residential Real Estate
Commercial and Industrial
Consumer and Other
Total recoveries
Net (charge-offs) recoveries
(1,701 )
(2,465 )
Provision charged to earnings
2,170
4,971
1,303
Balance at end of the period
$ 10,584
$ 10,115
$ 7,609
Ratios:
Net (charge-offs) recoveries to average loans
(0.215 )%
(0.305 )%
0.001 %
Allowance for loan losses to total loans
1.45 %
1.25 %
0.98 %
The following table provides an allocation of allowance for loan and lease losses by portfolio segment as of December 31, for each of the years shown:
December 31,
(In thousands)
Allowance for
loan losses
% of
loans
Allowance for
loan losses
% of
loans
Allowance for
loan losses
% of
loans
Commercial Real Estate
$ 4,485
42.37 %
$ 3,789
37.45 %
$ 1,866
24.53 %
Residential Real Estate
1,379
13.03 %
1,038
10.26 %
1,059
13.92 %
Commercial and Industrial
3,284
31.03 %
4,340
42.91 %
3,558
46.76 %
Consumer and Other
2.79 %
3.37 %
8.42 %
Construction
6.98 %
4.72 %
4.60 %
Construction to permanent - CRE
1.53 %
1.29 %
1.42 %
Unallocated
2.27 %
-
0.00 %
0.35 %
Total
$ 10,584
100.00 %
$ 10,115
100.00 %
$ 7,609
100.00 %
Nonperforming Assets
The following table presents non-accrual and accruing loans which were past due by over 90 days for the dates indicated:
(In thousands)
December 31,
Non-accruing loans:
Commercial Real Estate
$ 14,534
$ 11,961
$ 3,525
Residential Real Estate
3,854
3,228
2,006
Commercial and Industrial
2,094
4,681
Consumer and Other
Construction
-
-
8,800
Total non-accruing loans
20,005
18,049
19,186
Loans past due over 90 days and still accruing
1,316
Other real estate owned
1,906
2,400
2,945
Total nonperforming assets
$ 21,927
$ 20,468
$ 23,447
Nonperforming assets to total assets
2.49 %
2.09 %
2.46 %
Nonperforming loans to total loans, net
2.78 %
2.25 %
2.65 %
Non-accrual loans increased $2.0 million, from $18.0 million at December 31, 2019 to $20.0 million at December 31, 2020. The $20.0 million of non-accrual loans at December 31, 2020 was comprised of 21 borrowers, for which a specific reserve of $1.4 million was established. Six TDR loans of total $11.5 million were included in the non-accrual loans. For collateral dependent loans, the Bank has obtained appraisal reports from independent licensed appraisal firms and discounted those values based on the Bank’s experience selling OREO properties and for estimated selling costs to determine estimated impairment. For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate. The Bank evaluated the impaired loans individually and determined that a specific reserve of $1.4 million was established as of December 31, 2020.
As of December 31, 2019, the $18.0 million of non-accrual loans was comprised of 27 borrowers, for which a specific reserve of $1.5 million has been established. Two TDR loans of total $9.3 million were included in the non-accrual loans as of December 31, 2019.
Loans held for sale
Loans held for sale are made up of SBA loans which totaled $1.2 million and $15.3 million at December 31, 2020 and 2019, respectively.
SBA loans are originated under the U.S. Small Business Administration ("SBA") 7(a) program. Loans made by the Bank under the SBA 7(a) program generally are made to small businesses to provide working capital or to provide funding for the purchase of businesses, real estate, or equipment. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.
Under the SBA 7(a) program the loans generally carry a SBA guaranty for 75% of the loan. The Bank can sell the guaranteed portion in the secondary market and retain and hold for investment the related unguaranteed portion of these loans, as well as the servicing on such loans, for which it is paid a fee. SBA loans held for investment are included in the commercial real estate loans and commercial and industrial loan classifications.
Patriot sells the guaranteed portion of SBA loans for liquidity purposes and to generate non-interest income. Loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value. Loans held for sale at December 31, 2020, consisted entirely of $1.2 million SBA commercial and industrial loans. SBA loans held for sale at December 31, 2019, consisted of $10.2 million SBA commercial and industrial loans and $5.1 million SBA commercial real estate, respectively. The decrease in SBA loans held for sale was primarily due to $9.5 million transfer of SBA loans held for sale to held for investment, and sale of SBA loans in 2020. The Company sold $6.6 million SBA loans during the year ended December 31, 2020, compared to $12.0 million for the year ended December 31, 2019.
In September 2020, one commercial and industry loan of $5.0 million was reclassified from loans held for investment to loans held for sale. The loan was sold in October 2020 which resulted in proceeds of $5.0 million.
Premises and equipment
As of December 31, 2020 and 2019, Patriot recorded premises and equipment, net of $33.4 million and $34.6 million, respectively. The decrease was primarily due to normal depreciation of the active premises and equipment during the year ended December 31, 2020.
Management continuously reviews its branch locations and corporate offices to improve penetration in targeted markets and increase operating efficiencies.
Other Real Estate Owned (“OREO”)
As of December 31, 2020 and 2019, Patriot recorded OREO of $1.9 million and $2.4 million on the consolidated balance sheet, respectively. The 2020 OREO balance consisted of foreclosed residential properties from one loan receivable that is currently being marketed for sale as two properties. In 2020, Patriot sold one OREO of $446,000 and recognized a loss of $21,000. There was a write-down of $48,000 for the remaining OREO as of December 31, 2020, which is included in the non-interest expense on the consolidated statements of operations. In 2019, Patriot sold one OREO of $991,000 acquired from Prime Bank merger in May 2018 and recognized a loss of $94,000.
Goodwill
The Company completed its acquisition of Prime Bank in May 2018, and recorded $1.7 million of goodwill at December 31, 2018. The goodwill was adjusted to $1.1 million as a result of reducing by $621,000 the estimated amount to be paid pursuant to certain problem loans pending resolution as of May 10, 2019. As of December 31, 2020, Patriot reported an expense of $556,000 in the fourth quarter of 2020 based on an arbitrator letter that finalized a dispute relating to the determination of the final purchase price. The adjustment was recoded to the consolidated statements of operations for the year ended December 31, 2020. The Company performed its annual review of the goodwill as of December 31, 2020 and determined that there was no impairment of the goodwill.
Core deposit intangible (“CDI”)
Core deposit intangible (“CDI”) was recorded as part of the Prime Bank business combination in May 2018. The CDI is amortized over a 10-year period using the straight-line method. CDI decreased $280,000 from $623,000 at December 31, 2019 to $343,000 at December 31, 2020. The Company performed a review of the CDI as of October 31, 2020 and determined that there was an impairment charge of $206,000 of the CDI due to the decline in the interest rates in 2020. The amortization of the CDI was $74,000 and $75,000 for the year ended December 31, 2020 and 2019, respectively.
Deferred Taxes
As of December 31, 2020, Patriot had available approximately $21.8 million of Federal net operating loss carryforwards (“NOL”) that are offset by $15.5 million in Internal Revenue Code §382 limitations. Of the NOL of $21.8 million, approximately $20.2 million will expire between 2030 and 2033 and $1.56 million does not expire. For the year ended December 31, 2020 and 2019, the Bank recorded an uncertain tax position (“UTP”) of $0 and $1.1 million related to the utilization of certain federal net operating losses, respectively.
Additionally, Patriot has approximately $55.8 million of NOLs available for Connecticut tax purposes at December 31, 2020, which may be used to offset up to 50% of taxable income in any year. The NOLs expire between 2030 and 2039.
As of December 31, 2020, Patriot had a $11.5 million deferred tax asset, comprised of multiple temporary differences, in addition to the previously aforementioned NOLs. The assessment of the potential realizability of the deferred tax assets is based on observation of the condition and future of the Bank, including:
●
Cumulative pre-tax profit over the last three years, exclusive of an isolated fraud-related loss in 2019;
●
Forecasted taxable income for 2021 and future periods;
●
Historical average pre-tax income over the last four years adjusted for the fraud loss and other non-recurring expenses relating to merger and acquisition activity, and a reduced cost of funds now reflected in its most recent quarterly results;
●
Improvements in operations and cost management; and
●
Net operating loss carry-forwards that do not begin to expire until 2030.
After weighing both positive and negative evidence, Patriot recorded a valuation allowance of $1.9 million. Patriot will continue to evaluate its ability to realize its net deferred tax assets. If future evidence suggests that it is more likely than not that a portion of the deferred tax assets will not be realized, an additional valuation allowance will be established. As deferred tax assets associated with NOL carryforwards are already a direct reduction to Tier 1 Capital, the valuation allowance at December 31, 2020 had no impact on the Bank's regulatory capital position.
On March 27, 2020, the CARES Act was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, and modifications to the net interest deduction limitations. While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s income taxes or related disclosures.
Derivatives
As of December 31, 2020, Patriot had entered into four interest rate swaps (“swaps”). Two swaps are with a loan customer to provide a facility to mitigate the fluctuations in the variable rate on the respective loan. The other two swaps are with an outside third party. The customer interest rate swaps are matched in offsetting terms to the third party interest rate swaps. The swaps are reported at fair value in other assets or other liabilities on the consolidated balance sheets. Patriot’s swaps are derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income. The Company recognized $30,000 gain on the swaps for the year ended December 31, 2019. No gain on the swaps was recognized for the year ended December 31, 2020 and 2018.
Further discussion of the final derivatives is set forth in Note 11 to the consolidated financial statements.
Deposits
The following table is a summary of the Company’s deposits at the dates shown:
(In thousands)
December 31,
Non-interest bearing
$ 158,676
$ 88,135
$ 84,471
Interest bearing:
NOW
30,529
26,864
26,100
Savings
98,635
64,020
81,912
Money market
146,389
99,115
85,197
Certificates of deposit, less than $250,000
160,968
193,942
203,683
Certificates of deposit, $250,000 or greater
49,172
67,550
78,318
Brokered deposits
41,287
229,909
183,600
Total Interest bearing
526,980
681,400
658,810
Total Deposits
$ 685,656
$ 769,535
$ 743,281
Total deposits decreased by $83.8 million or 10.9%, from $769.5 million at December 31, 2019 to $685.7 million at December 31, 2020, resulting from a reduction of $188.6 million in higher cost brokered deposits and $51.4 million of certificates of deposits, as those balances were allowed to roll off in connection with the planned decline in outstanding loan balances. These declines were was partially offset by an increase in money market deposits impacted by the roll-out of the Company’s national on-line money market account which added $26.2 million to the money market balance, and a $59.3 million increase in non-interest bearing deposits related to the prepaid debit card business through December 31, 2020.
Borrowings
As of December 31, 2020 and 2019, total borrowings were $120.8 million and $130.9 million, respectively. Borrowings consist of Federal Home Loan Bank (“FHLB”) advances, senior notes, junior subordinated debentures, and a note payable to the seller from whom the Fairfield branch building was purchased in 2015.
Shareholders’ Equity
Equity decreased $3.8 million from $67.0 million at December 31, 2019 to $63.2 million at December 31, 2020. The decrease was primarily due to $3.8 million of net loss for the year ended December 31, 2020 and $115,000 investment portfolio unrealized loss, which was partially offset by $159,000 of equity compensation for the year ended December 31, 2020.
Average Balances
The following table presents daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for each of the years in the three-year period ended December 31, 2020.
(In thousands)
Year ended December 31,
Daily
Average
Balance ($)
Interest
($)
Yield
(%)
Daily
Average
Balance ($)
Interest
($)
Yield
(%)
Daily
Average
Balance ($)
Interest
($)
Yield
(%)
ASSETS
Interest Earning Assets:
Loans
$ 791,626
$ 35,835
4.51
$ 807,162
$ 40,568
5.03
$ 748,260
$ 37,546
5.02
Investments
59,668
1,859
3.12
56,897
2,120
3.73
45,514
1,796
3.95
Cash equivalents and other
49,071
0.42
45,276
2.11
55,858
1,033
1.84
Total interest earning assets
900,365
37,903
4.20
909,335
43,644
4.80
849,632
40,375
4.75
Cash and due from banks
2,357
5,024
5,330
Allowance for loan losses
(10,896 )
(8,087 )
(6,507 )
OREO
2,259
2,551
Other assets
62,086
59,318
54,017
Total Assets
$ 956,171
$ 968,141
$ 903,220
Liabilities
Interest bearing liabilities:
Deposits
$ 641,981
$ 9,154
1.42
$ 682,826
$ 13,985
2.05
$ 616,081
$ 9,024
1.46
Borrowings
92,469
2,671
2.88
94,084
2,175
2.31
108,108
1,634
1.51
Senior notes
11,888
7.70
11,814
7.75
11,739
7.79
Subordinated debt
17,872
5.53
17,834
1,118
6.27
13,060
5.87
Note Payable and other
1,086
1.74
1,364
1.83
2,037
1.87
Total interest bearing liabilities
765,296
13,750
1.79
807,922
18,218
2.25
751,025
12,378
1.65
Demand deposits
116,519
81,754
78,765
Other liabilities
8,760
8,965
4,545
Total Liabilities
890,575
898,641
834,335
Shareholders' equity
65,596
69,500
68,885
Total Liabilities and Shareholders' Equity
$ 956,171
$ 968,141
$ 903,220
Net interest income
$ 24,153
$ 25,426
$ 27,997
Interest margin
2.68
2.80
3.29
Interest spread
2.41
2.55
3.10
The following table presents the change in interest-earning assets and interest-bearing liabilities by major category and the related change in the interest income earned and interest expense incurred thereon attributable to the change in transactional volume in the financial instruments and the rates of interest applicable thereto, comparing the years ended December 31, 2020 to 2019 and December 31, 2019 to 2018.
Year Ended December 31,
2020 compared to 2019
2019 compared to 2018
(In thousands)
Increase/(Decrease)
Increase/(Decrease)
Daily
Average
Balance
Volume
Rate
Total
Daily
Average
Balance
Volume
Rate
Total
Interest Earning Assets:
Loans
$ (15,536 )
$ (744 )
$ (3,989 )
$ (4,733 )
$ 58,902
$ 2,894
$
$ 3,022
Investments
2,771
(358 )
(261 )
11,383
(88 )
Cash equivalents and other
3,795
(829 )
(747 )
(10,582 )
(199 )
(77 )
Total interest earning assets
(8,970 )
(565 )
(5,176 )
(5,741 )
59,703
3,107
3,269
Interest bearing liabilities:
Deposit
(40,845 )
(1,366 )
(3,465 )
(4,831 )
66,745
1,609
3,352
4,961
Borrowings
(1,615 )
(35 )
(14,024 )
(212 )
Senior notes
-
-
-
-
-
-
Subordinated debt
-
(127 )
(127 )
4,774
Note payable and other
(278 )
(6 )
-
(6 )
(673 )
(13 )
-
(13 )
Total interest bearing liabilities
(42,626 )
(1,407 )
(3,061 )
(4,468 )
56,897
1,664
4,176
5,840
Net interest income
$ 33,656
$
$ (2,115 )
$ (1,273 )
$ 2,806
$ 1,443
$ (4,014 )
$ (2,571 )
RESULTS OF OPERATIONS
A discussion regarding our financial condition and results of operations for fiscal 2020 compared to fiscal 2019 is presented below. Discussions of fiscal 2019 items and year-to-year comparisons between fiscal 2019 and fiscal 2018 that are not included in this Form 10-K can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on April 29, 2020.
Comparison of Results of Operations for the years 2020 and 2019
For the year ended December 31, 2020, the Company recorded a net loss of $3.8 million ($0.97 basic and diluted loss per share) compared to a net loss of $2.8 million ($0.72 basic and diluted earnings per share) for the year ended December 31, 2019.
Loss before tax benefit was $4.2 million for the year ended December 31, 2020, compared to income before income tax expense of $3.7 million for the year ended December 31, 2019. Significant variances include:
•
Interest and dividend income decreased $5.7 million;
•
Interest expense decreased $4.4 million;
•
Net interest income decreased $1.2 million;
•
Provision for loan losses decreased $2.8 million; and
•
Non-interest expense increased $1.4 million.
Net interest income
Net interest income is the difference between interest income on interest earning assets and interest expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest earning assets and interest-bearing liabilities and the interest rates earned or paid on them, respectively.
For the year ended December 31, 2020, interest income decreased to $37.9 million, as compared to $43.6 million for the year ended December 31, 2019, which was primarily attributable to a decrease of $15.5 million in average loan balances, along with a decline in rates earned on loans reflecting the sharp drop in interest rates early in 2020.
Total interest expense decreased to $13.8 million, as compared to $18.2 million for the year ended December 31, 2019, primarily due to a decrease of $4.8 million in deposit interest expense, which was partially offset by an increase of $496,000 in interest on FHLB borrowings. The decline in deposit interest expense reflects a change in the composition of deposits as higher cost brokered deposits were allowed to mature without replacement to match the overall decline in average earning assets. In addition, retail deposit rates declined as market rates declined nationally as well as in Patriot’s local retail deposit market. Finally, the addition of the prepaid deposit business (adding $59.3 million of deposits at the end of 2020) contributed to the overall drop in deposit interest expense.
Net interest income for the years ended December 31, 2020 and 2019 was $24.2 million and $25.4 million, respectively. Net interest margin for the year ended December 31, 2020 and 2019 were 2.7% and 2.8%, respectively.
The overall decline in net interest income was primarily due to the decline in business activity reflected in a $15.5 million decline in the average loan balance during 2020 connected to the COVID-19 pandemic. Further, asset yields were impacted by the sharp decline in interest rates at the beginning of the second quarter while retail and brokered deposit rates declined at a slower pace. Compared to the prior year, net interest income was also negatively impacted by an increase in the rate paid on FHLB borrowings associated with the conversion of certain borrowings from a low variable teaser rate to higher fixed rate.
Provision for loan losses
For the year ended December 31, 2020, provision for loan losses was $2.2 million, as compared with $5.0 million in 2019. The provision for loan losses in 2020 was primarily due to a $900,000 loan charge-off on a single borrower and additional reserves attributable to the COVID-19 pandemic. For the year ended December 31, 2019, the provision for loan losses was primarily attributable to a $2.3 million commercial loan charge-off and a reserve for loan losses of $1.5 million for one commercial real estate loan in 2019.
Non-interest income
For the year ended December 31, 2020, non-interest income decreased to $2.0 million, as compared to $2.5 million in 2019. The decrease was primarily attributable to a reduction of $325,000 in net realized gains on the sale of SBA loans associated with delays in executing the sale of those loans associated with the COVID-19 pandemic.
Non-interest expense
For the year ended December 31, 2020, non-interest expense increased to $28.1 million, as compared to $26.7 million for 2019. The increase in non-interest expenses was primarily driven by an increase of $642,000 in salaries and benefits reflecting the build-up of staffing in the SBA business since the second half of 2019, an increase in project expense of $353,000, and an increase of $244,000 in regulatory assessments.
LIQUIDITY
The Company’s balance sheet liquidity to total assets ratio was 9.0% at December 31, 2020 compared to 10.0% at December 31, 2019. Liquidity including readily available off-balance sheet funding sources was 21.7% at December 31, 2020 compared to 17.3% at December 31, 2019.
The following categories of assets are considered balance sheet liquidity: cash and due from banks, federal funds sold (if any), short-term investments (if any), unpledged available-for-sale securities, and loans held for sale. In addition, off-balance sheet funding sources include collateral based borrowing available from the FHLB, and correspondent bank borrowing lines.
Liquidity is a measure of the Company’s ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts. Management believes the Company’s liquid assets provide sufficient coverage to satisfy loan demand, cover potential fluctuations in deposit accounts, and to meet other anticipated operational cash requirements.
The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). At December 31, 2020, the outstanding advances from the FHLB-B aggregated $90.0 million. The additional borrowing capacity available from FHLB-B is $80.4 million, which is comprised of $78.4 million of advances and a $2.0 million overnight line of credit. Additionally, the Bank retains a collateralized borrowing line with the Federal Reserve Bank which totaled $26.3 million at December 31, 2020.
OFF-BALANCE SHEET ARRANGEMENTS
The Bank’s off-balance sheet commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon or are contingent upon the customer adhering to the terms of the agreements, the total commitment amounts do not necessarily represent future cash requirements. As of December 31, 2020 and 2019, the Bank’s off-balance sheet commitments were $122.4 million and $145.1 million, respectively.
REGULATORY CAPITAL REQUIREMENTS
The following tables illustrate the Company’s and the Bank’s regulatory capital ratios at December 31, 2020 and 2019:
Patriot National Bancorp, Inc.
Patriot Bank, N.A.
(In thousands)
December 31, 2020
December 31, 2019
December 31, 2020
December 31, 2019
Amount
($)
Ratio
(%)
Amount
($)
Ratio
(%)
Amount
($)
Ratio
(%)
Amount
($)
Ratio
(%)
Total Capital (to risk weighted assets)
$ 87,428
11.132
$ 90,083
10.510
$ 97,614
12.503
$ 100,953
11.826
Tier 1 Capital (to risk weighted assets)
67,602
8.608
69,957
8.161
87,845
11.251
90,827
10.640
Common Equity Tier 1 Capital (to risk weighted assets)
59,602
7.589
61,957
7.228
87,845
11.251
90,827
10.640
Tier 1 Leverage Capital (to average assets)
67,602
7.539
69,957
7.148
87,845
9.795
90,827
9.279
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. Under the regulatory framework for prompt correction action, to be considered “well capitalized,” an institution must generally have a leverage capital ratio of at least 9.0%, CET1 capital ratio at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a total risk-based capital ratio of at least 10%. However, the OCC has the discretion to require increased capital ratios.
Under the final capital rules that became effective on January 1, 2015, there is 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 buffer requirement was phased in over three years beginning in 2016. The capital conversation buffer increased to 2.5% for 2019 and 2020, which has been included in the minimum capital adequacy ratios in the table above.
The capital buffer requirement effectively raises the Bank’s minimum required Total Capital ratio to 10.5%, the Tier 1 Capital ratio to 8.5%, and the CET1 Capital ratio to 7.0% on a fully phased-in basis, which was effective on January 1, 2019. As of December 31, 2020, Patriot satisfies all capital adequacy requirements on a fully phased-in basis.
On January 22, 2019, based on its supervisory profile, the Bank was notified by the OCC that it established individual minimum capital ratios for the Bank. Specifically, the Bank is required to maintain a Tier 1 leverage ratio of 9.0% and a total risk-based capital to risk-weighted assets of 11.0%.
At December 31, 2020, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $87.8 million, or 9.8% of adjusted total assets, which is above the well-capitalized required level of 9.0%; total risk-based capital of $97.6 million, or 12.5% of risk-weighted assets, which is above the well-capitalized required level of 11.0% of risk-weighted assets; At December 31, 2019, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of 9.3% of adjusted total assets of $90.8 million, which is above the well-capitalized required level of 9.0%; and total risk-based capital of $101.0 million, or 11.8% of risk-weighted assets, which is above the well-capitalized required level of 11.0% of risk weighted assets. Accordingly, the Bank was categorized as well capitalized at December 31, 2020 and 2019. Management is not aware of any conditions or events since the most recent notification that would change the Bank’s category.
Management continuously assesses the adequacy of the Bank’s capital with the goal to maintain a “well capitalized” classification.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is defined as the sensitivity of income to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices and other market-driven rates or prices. The Bank’s market risk is primarily limited to interest rate risk.
The Bank’s goal is to maximize long term profitability while minimizing its exposure to interest rate fluctuations. The first priority is to structure and price the Bank’s assets and liabilities to maintain an acceptable interest rate spread while reducing the net effect of changes in interest rates. In order to accomplish this, the focus is on maintaining a proper balance between the timing and volume of assets and liabilities re-pricing within the balance sheet. One method of achieving this balance is to originate variable rate loans for the portfolio and purchase short-term investments to offset the increasing short-term re-pricing of the liability side of the balance sheet. In fact, a number of the interest-bearing deposit products have no contractual maturity. Therefore, deposit balances may run off unexpectedly due to changing market conditions. Additionally, loans and investments with longer term rate adjustment frequencies can be matched against longer term deposits and borrowings to lock in a desirable spread.
The exposure to interest rate risk is monitored by the Management Asset and Liability Committee consisting of senior management personnel. The Committee reviews the interrelationships within the balance sheet to maximize net interest income within acceptable levels of risk. This Committee reports to the Board of Directors. In addition to the Management Asset and Liability Committee, there is a Board Asset and Liability Committee (“ALCO”), which meets quarterly. ALCO monitors the interest rate risk analyses, reviews investment transactions during the period and determines compliance with the Bank’s Investment, ALCO and Liquidity policies.
Management analyzes the Bank’s interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation and GAP analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period.
Management’s goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to ALCO. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. Changes to these assumptions can significantly affect the results of the simulations. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.
Simulation analysis is only an estimate of the Company’s interest rate risk exposure at a particular point in time. Management regularly reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.
The tables below set forth examples of changes in estimated net interest income and the estimated net portfolio value based on projected scenarios of interest rate increases and decreases. The analyses indicate the rate risk embedded in the Company’s portfolio at the dates indicated should all interest rates instantaneously rise or fall. The results of these changes are added to or subtracted from the base case; however, there are certain limitations to these types of analyses. Rate changes are rarely instantaneous, and these analyses may therefore overstate the impact of short-term repricings. As a result of the historically low interest rate environment, the calculated effects of the 100 and 200 basis point downward shocks cannot absolutely reflect the risk to earnings and equity, since the interest rates on certain balance sheet items have approached their minimums. Therefore, it is not possible for the analyses to fully measure the true impact of these downward shocks.
(In thousands)
Net Portfolio Value - Performance Summary
As of December 31, 2020
As of December 31, 2019
Projected Interest
Rate Scenario
Estimated
Value
Change from
Base ($)
Change from
Base (%)
Estimated
Value
Change from
Base ($)
Change from
Base (%)
+200
$ 111,300
2,524
2.3
$ 115,401
$ (4,473 )
(3.7 )
+100
110,657
1,881
1.7
119,249
(625 )
(0.5 )
BASE
108,776
-
-
119,874
-
-
112,229
3,453
3.2
119,167
(707 )
(0.6 )
129,821
21,045
19.3
117,418
(2,456 )
(2.0 )
(In thousands)
Net Interest Income - Performance Summary
Year ended December 31, 2020
Year ended December 31, 2019
Projected Interest
Rate Scenario
Estimated
Value
Change from
Base ($)
Change from
Base (%)
Estimated
Value
Change from
Base ($)
Change from
Base (%)
+200
$ 28,959
$ 1,926
7.1
$ 30,354
$ 2,160
7.7
+100
27,946
3.4
29,385
1,191
4.2
BASE
27,033
-
-
28,194
-
-
27,162
0.5
27,173
(1,021 )
(3.6 )
27,215
0.7
26,280
(1,914 )
(6.8 )
Impact of Inflation and Changing Prices
Patriot’s financial statements have been prepared in terms of historical dollars, without considering changes in relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on the Bank’s performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Notwithstanding this, inflation can directly affect the value of loan collateral, in particular, real estate. Inflation, or disinflation, could significantly affect Patriot’s earnings in future periods.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
-
Consolidated Balance Sheets as of December 31, 2020 and 2019
-
Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2020
-
Consolidated Statements of Comprehensive (Loss) Income for each of the years in the three-year period ended December 31, 2020
-
Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period ended December 31, 2020
-
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2020
-
Consolidated Supplemental Statements of Non-Cash Activity for each of the years in the three-year period ended December 31, 2020
-
Notes to Consolidated Financial Statements
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, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Qualitative Adjustments to the Allowance for Loan and Lease Losses
As described in Notes 1 and 4 of the consolidated financial statements, the Company’s allowance for loan and lease losses (allowance) totaled $10.6 million as of December 31, 2020. The recorded allowance was established based on an allowance of $9.2 million related to loans collectively evaluated for impairment and on an allowance of $1.4 million relating to loans individually evaluated for impairment as of December 31, 2020.
For loans that are collectively evaluated for impairment, the Company segregates loans into pools based on homogeneous risk characteristics. The non-specific allowance is established through historical loss experience of the loan pools over their respective loss emergence periods adjusted for qualitative factors. The qualitative factors are additional reserves applied to the segmented loan pools to reflect the inherent risk of loss that exists in the portfolio as of the balance sheet date. The Company has determined qualitative factors to include: 1) changes in lending policies and procedures; 2) changes in international, national, regional, and local economic and business conditions and developments; 3) changes in the nature and volume of the portfolio and in the terms of loans; 4) changes in the experience, ability, and depth of lending management and staff; 5) changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans; 6) changes in the quality of the Company’s loan review system; 7) changes in the value of underlying collateral for collateral-dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; 9) the effect of other external factors; and 10) an additional factor allocated to special mention and substandard rated loans. In addition and as a response to the COVID-19 pandemic, the Company also applied a qualitative factor related to this event, which is designed to absorb probable incurred loan losses that are negatively affected by the COVID-19 pandemic. Evaluation of the allowance, in particular the qualitative factor adjustments, requires considerable judgment, in order to adequately estimate and provide for the risk of loss inherent in the loan portfolio segments.
We identified the qualitative factors adjustments applied to the non-specific allowance as a critical audit matter due to the high degree of auditor judgment in order to evaluate the subjective assumptions made by management within the calculation.
Our audit procedures related to the qualitative factor adjustments applied to the non-specific allowance included the following:
-
We tested the completeness and accuracy of data used by management in determining the qualitative factor adjustments by agreeing them to their appropriate internal or external sources.
-
We evaluated the reasonableness of the directional consistency of changes in qualitative factor adjustments as well as the overall magnitude of management’s qualitative factor adjustments applied to each pool based on the data used by management.
Goodwill Impairment Assessment
As described in Notes 1 and 8 of the consolidated financial statements, the Company’s goodwill balance totaled $1.1 million as of December 31, 2020. The Company performs a goodwill impairment test annually as of October 31, or whenever certain triggering events occur or there are circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount are identified. Management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the Company, assumptions within the capitalization rate, valuation multiples, and market data used.
We identified the impairment assessment of goodwill as a critical audit matter due to the high degree of auditor judgement and subjectivity in order to evaluate the fair value of the reporting unit due to the judgements made by management in the estimation of the Company’s reporting unit fair value, including those related to future cash flows, the capitalization rate, the valuation multiples used, and the market data incorporated into the estimate. In addition, the increased audit effort involved the use of internal professionals with specialized skill and knowledge in the field of business valuation.
Our audit procedures related to goodwill impairment assessment included the following for the impairment test performed for the year:
-
We evaluated management’s process for developing the fair value estimates of the reporting unit including an assessment of the appropriateness of the valuation techniques used.
-
We evaluated management’s cash flow projections and significant assumptions incorporated into the business plan by considering the current and past performance by the Company, the Company’s ability to meet financial projections, and the consistency of these assumptions with evidence obtained in other areas of the audit.
-
We used the assistance of internal professionals with specialized skill and knowledge to assist in the evaluation of significant assumptions used in the valuation methodology. This included:
o
Testing the fair value of the reporting unit through testing of the completeness and accuracy of the data used by management to develop the estimate.
o
Evaluating the reasonableness of the cash flow projections calculations used to develop the estimate.
o
Evaluating the capitalization rate, the valuation multiples used, and the market data incorporated into the estimate by assessing the reasonableness, comparability and appropriateness of the market-based information used by agreeing the components to independent source data.
Realizability of the Deferred Tax Assets
As discussed in Notes 1 and 14 to the consolidated financial statements, the Company has recorded $11.3 million in deferred tax assets, net of a $1.9 million state net operating loss valuation allowance, as of December 31, 2020. Management applied significant judgment in assessing the positive and negative evidence available in the determination of the amount of deferred tax assets that were more-likely-than-not to be realized in the future. In evaluating the need, or continued need, for a valuation allowance, management considers the weighting of the positive and negative evidence, which included, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, forecasts of future profitability, the duration of statutory carryforward periods, as well as the Company’s intent and ability to implement tax strategies.
We identified the realizability of deferred tax assets as a critical audit matter because of the significant assumptions and judgments use by management in determining the amount of deferred tax assets that were more-likely-than-not to be realized in the future, which in turn led to a high degree of auditor judgment and subjectivity in applying procedures relating to assessing the positive and negative evidence considered by management. Additionally, there was significant audit effort necessary in evaluating the weighting of the positive and negative evidence, including the use of internal professionals with specialized skill and knowledge in the field of income tax accounting.
Our audit procedures related to the realizability of the Company’s deferred tax assets included the following, among others:
-
We obtained an understanding and evaluated management’s process over the assessment of the realizability of deferred tax assets, including how it incorporates positive and negative evidence into its evaluation.
-
We evaluated the positive and negative evidence in assessing whether the deferred tax assets are more-likely-than-not to be realized in the future, including evaluating the trends of both the historical financial results and the projected sources of taxable income, as well as other qualitative factors.
-
We evaluated management’s cash flow projections and significant assumptions incorporated into the business plan by considering the current and past performance by the Company, the Company’s ability to meet financial projections, and the consistency of these assumptions with evidence obtained in other areas of the audit.
-
With the assistance of our internal tax professionals, we evaluated the Company’s application of income tax accounting guidance and regulations used in its realizability analysis.
-
We evaluated the Company’s consideration of cumulative pre-tax losses and the net deferred tax position in assessing whether deferred tax assets were more-than-not to be realized in the future, which included:
o
Testing the completeness and accuracy of the data used by management in their analyses.
o
Evaluating the reasonableness of management’s evaluation of whether tax planning strategies were prudent and feasible.
o
Evaluating management’s intent and ability to implement tax strategies in order to realize state net operating losses before expiration.
/s/ RSM US LLP
We have served as the Company’s auditor since 2017.
New Haven, Connecticut
March 30, 2021
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except share data)
Assets
Cash and due from banks:
Noninterest bearing deposits and cash
$ 3,006
$ 2,693
Interest bearing deposits
31,630
36,711
Total cash and cash equivalents
34,636
39,404
Investment securities:
Available-for-sale securities, at fair value
49,262
48,317
Other investments, at cost
4,450
4,450
Total investment securities
53,712
52,767
Federal Reserve Bank stock, at cost
2,783
2,897
Federal Home Loan Bank stock, at cost
4,503
4,477
Loans receivable (net of allowance for loan losses: 2020: $10,584 and 2019: $10,115)
719,596
802,049
Loans held for sale
1,217
15,282
Accrued interest and dividends receivable
6,620
3,603
Premises and equipment, net
33,423
34,568
Other real estate owned
1,906
2,400
Deferred tax asset, net
11,496
11,133
Goodwill
1,107
1,107
Core deposit intangible, net
Other assets
9,387
9,526
Total assets
$ 880,729
$ 979,836
Liabilities
Deposits:
Noninterest bearing deposits
$ 158,676
$ 88,135
Interest bearing deposits
526,980
681,400
Total deposits
685,656
769,535
Federal Home Loan Bank and correspondent bank borrowings
90,000
100,000
Senior notes, net
11,927
11,853
Subordinated debt, net
9,782
9,752
Junior subordinated debt owed to unconsolidated trust, net
8,110
8,102
Note payable
1,193
Advances from borrowers for taxes and insurance
3,786
3,681
Accrued expenses and other liabilities
7,255
8,726
Total liabilities
817,510
912,842
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, 2020: 4,017,313 shares issued; 3,943,572 shares outstanding; As of December 31, 2019: 4,004,410 shares issued; 3,930,669 shares outstanding
106,329
106,170
Accumulated deficit
(42,592 )
(38,773 )
Accumulated other comprehensive loss
(518 )
(403 )
Total shareholders' equity
63,219
66,994
Total liabilities and shareholders' equity
$ 880,729
$ 979,836
See Accompanying Notes to Consolidated Financial Statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
(In thousands, except per share amounts)
Interest and Dividend Income
Interest and fees on loans
$ 35,835
$ 40,568
$ 37,546
Interest on investment securities
1,460
1,667
1,306
Dividends on investment securities
Other interest income
1,033
Total interest and dividend income
37,903
43,644
40,375
Interest Expense
Interest on deposits
9,154
13,985
9,024
Interest on Federal Home Loan Bank borrowings
2,671
2,175
1,634
Interest on senior debt
Interest on subordinated debt
1,118
Interest on note payable and other
Total interest expense
13,750
18,218
12,378
Net interest income
24,153
25,426
27,997
Provision for Loan Losses
2,170
4,971
1,303
Net interest income after provision for loan losses
21,983
20,455
26,694
Non-interest Income
Loan application, inspection and processing fees
Deposit fees and service charges
Gains on sales of loans
Rental income
Other income
Total non-interest income
1,979
2,483
1,627
Non-interest Expense
Salaries and benefits
14,323
13,681
11,741
Occupancy and equipment expense
3,513
3,521
3,159
Data processing expense
1,571
1,463
1,313
Professional and other outside services
2,828
3,010
2,177
Project expenses, net
2,098
Advertising and promotional expense
Loan administration and processing expense
Regulatory assessments
1,477
1,233
1,142
Insurance expense, net
Communications, stationary and supplies
Other operating expense
2,199
2,092
1,661
Total non-interest expense
28,118
26,654
24,235
(Loss) income before income taxes
(4,156 )
(3,716 )
4,086
(Benefit) provision for income taxes
(337 )
(899 )
Net (loss) income
$ (3,819 )
$ (2,817 )
$ 3,196
Basic (loss) earnings per share
$ (0.97 )
$ (0.72 )
$ 0.82
Diluted (loss) earnings per share
$ (0.97 )
$ (0.72 )
$ 0.82
See Accompanying Notes to Consolidated Financial Statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Year Ended December 31,
Net (loss) income
$ (3,819 )
$ (2,817 )
$ 3,196
Other comprehensive (loss) income
Unrealized holding (loss) gain on securities
(155 )
(860 )
Income tax effect
(148 )
Total other comprehensive (loss) income
(115 )
(671 )
Comprehensive (loss) income
$ (3,934 )
$ (2,394 )
$ 2,525
See Accompanying Notes to Consolidated Financial Statements.
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, 2018
3,899,675
$ 105,736
$ (38,832 )
$ (155 )
$ 66,749
Comprehensive income:
Net income
-
-
3,196
-
3,196
Unrealized holding loss on available-for-sale securities, net of tax
-
-
-
(671 )
(671 )
Total comprehensive income
-
3,196
(671 )
2,525
Common stock dividends
-
-
(154 )
-
(154 )
Share-based compensation expense
-
-
-
Vesting of restricted stock
10,999
-
-
-
-
Balance at December 31, 2018
3,910,674
$ 105,956
$ (35,790 )
$ (826 )
$ 69,340
Comprehensive income:
Net loss
-
-
(2,817 )
-
(2,817 )
Unrealized holding gain on available-for-sale securities, net of tax
-
-
-
Total comprehensive income
-
-
(2,817 )
(2,394 )
Common stock dividends
-
-
(155 )
-
(155 )
Share-based compensation expense
-
-
-
Transition adjustment related to adoption of ASC 842, net of tax
-
-
(11 )
-
(11 )
Vesting of restricted stock
19,995
-
-
-
-
Balance at December 31, 2019
3,930,669
$ 106,170
$ (38,773 )
$ (403 )
$ 66,994
Comprehensive income:
Net loss
-
-
(3,819 )
-
(3,819 )
Unrealized holding gain on available-for-sale securities, net of tax
-
-
-
(115 )
(115 )
Total comprehensive income
-
-
(3,819 )
(115 )
(3,934 )
Share-based compensation expense
-
-
-
Vesting of restricted stock
12,903
-
-
-
-
Balance at December 31, 2020
3,943,572
$ 106,329
$ (42,592 )
$ (518 )
$ 63,219
See Accompanying Notes to Consolidated Financial Statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
Cash Flows from Operating Activities:
Net (loss) income
$ (3,819 )
$ (2,817 )
$ 3,196
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Amortization (accretion) of investment premiums (discounts), net
Amortization and accretion of purchase loan premiums and discounts
Amortization of debt issuance costs
Amortization of core deposit intangible
Amortization of servicing assets of sold SBA loans
-
Impairment of intangible assets
-
-
Purchase price adjustment expense related to acquisition activity
-
-
Provision for loan losses
2,170
4,971
1,303
Depreciation and amortization
1,505
1,600
1,486
Share-based compensation
Increase in deferred income taxes
(323 )
(1,136 )
(265 )
Originations of SBA loans held for sale
(2,049 )
(26,947 )
(2,254 )
Proceeds from sale of SBA loans held for sale
12,160
12,556
2,096
Gains on sale of SBA loans held for sale, net
(566 )
(891 )
(155 )
Net loss on sale and write-down of other real estate owned
-
Changes in assets and liabilities:
(Increase) decrease in accrued interest and dividends receivable
(3,017 )
(270 )
Increase in other assets
(331 )
(1,180 )
(981 )
(Decrease) increase in accrued expenses and other liabilities
(1,732 )
Net cash provided by (used in) operating activities
6,281
(11,915 )
5,272
Cash Flows from Investing Activities:
Proceeds from maturity or sales on available-for-sale securities
-
6,500
37,032
Principal repayments on available-for-sale securities
9,879
3,893
2,267
Purchases of available-for-sale securities
(11,248 )
(18,072 )
(18,562 )
Purchases of other investments
-
-
(513 )
Proceeds from maturity of other investments
-
Redemption (purchases) of Federal Reserve Bank stock
(31 )
(364 )
(Purchases) redemptions of Federal Home Loan Bank stock
(26 )
Decrease in originated loans receivable, net
116,635
18,728
5,572
Purchases of loans receivable
(32,785 )
(54,604 )
(47,074 )
Purchases of premises and equipment
(70 )
(552 )
(1,142 )
Proceeds from sale of other real estate owned
-
Refund of (payment for) escrow deposit related to acquisition activity
-
(500 )
Net cash used in business combination
-
-
(5,071 )
Net cash provided by (used in) investing activities
82,924
(41,777 )
(26,882 )
Cash Flows from Financing Activities:
(Decrease) increase in deposits, net
(133,877 )
26,254
59,658
Purchases of deposits
49,998
-
-
Repayments of FHLB borrowings
(10,000 )
-
(29,800 )
Proceeds from issuance of subordinated note, net
-
-
9,709
Principal repayments of note payable
(199 )
(195 )
(192 )
Decrease in advances from borrowers for taxes and insurance
Dividends paid on common stock
-
(155 )
(154 )
Net cash (used in) provided by financing activities
(93,973 )
26,659
39,318
Net (decrease) increase in cash and cash equivalents
(4,768 )
(27,033 )
17,708
Cash and cash equivalents at beginning of period
39,404
66,437
48,729
Cash and cash equivalents at end of period
$ 34,636
$ 39,404
$ 66,437
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Year Ended December 31,
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest
$ 15,037
$ 17,740
$ 11,246
Cash (refund) paid for income taxes, net
$ (659 )
$
$ 1,243
Non-cash transactions:
Purchase of premises and equipment
$
$
$
Increase in accrued expense and other liabilities
$ (290 )
$ (181 )
$ (415 )
Purchases of available-for-sale securities
$ -
$
$ -
Increase in accrued expense and other liabilities
$ -
$ (578 )
$ -
Transfers of loans receivable to other real estate owned
$ -
$
$ 1,954
Transfers of SBA loans held for sale to loans receivable
$ 9,542
$ -
$ -
Transfers of loans receivable to loans held for sale
$ 5,022
$ -
$ -
Operating lease right-of-use assets
$
$ 3,160
$ -
Operating lease liabilities
$ (40 )
$ (3,364 )
$ -
Accrued rent payable - adoption ASC 842
$
$
$ -
Capitalized servicing assets
$
$
$ -
Increase in interest rate swaps assets
$
$ -
$ -
Increase in interest rate swaps liabilities
$ (493 )
$ -
$ -
Business Combination Non-Cash Disclosures:
Assets acquired in business combination (net of cash received)
$ -
$ -
$ 60,173
Liabilities acquired in business combination
$ -
$ -
$ (56,123 )
Contingent liability assumed in business combination
$ -
$
$ (707 )
Decrease in escrow deposit related to acquisition activity
$ (657 )
$ -
$ -
Decrease in liabilities related to acquisition activity
$
$ -
$ -
Decrease in contingent consideration related to acquisition activity
$
$ -
$ -
See Accompanying Notes to Consolidated Financial Statements.
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"), a Connecticut corporation, is a bank holding company that was organized in 1999. Patriot Bank, N.A. (the "Bank") (collectively, “Patriot”) is a wholly owned subsidiary of the Company. The Bank is a nationally chartered commercial bank whose deposits are insured under the Bank Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The Bank provides a full range of banking services to commercial and consumer customers through its main office in Stamford, Connecticut, seven branch offices in Connecticut and two branch offices in New York. The Bank's customers are concentrated in Fairfield and New Haven Counties in Connecticut and Westchester County in New York.
On March 11, 2003, the Company formed Patriot National Statutory Trust I (the “Trust”) for the purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures issued by the Company, and on March 26, 2003, the first series of trust preferred securities were issued. In accordance with accounting principles generally accepted in the United States of America (“US GAAP”), the Trust is not included in the Company’s consolidated financial statements.
On May 10, 2018, the Bank completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT (“Prime Bank”). The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut. The results of Prime Bank’s operations are included in the Company’s consolidated financial statements from the date of acquisition.
The preparation of consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified accounting for the allowance for loan and lease losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets, the impairment of goodwill, the valuation of derivatives, and the valuation of servicing assets as certain of Patriot’s more significant accounting policies and estimates, in that they are critical to the presentation of Patriot’s financial condition and results of operations. As they concern matters that are inherently uncertain, these estimates require management to make subjective and complex judgments in the preparation of Patriot’s consolidated financial statements.
COVID-19 Impact:
In March 2020, the World Health Organization declared novel coronavirus disease 2019 ("COVID-19") as a global pandemic. The COVID-19 pandemic has negatively impacted the global and U.S. economies. Many businesses in the U.S., including those in the markets we serve, were required to close, causing a significant increase in unemployment and loss of revenue.
The consolidated financial statements reflect estimates and assumptions that affect the reported amounts of assets and liabilities, including the amount of the allowance for loan losses. The assumptions and estimates used in the financial statements were impacted by the COVID-19 pandemic. The COVID-19 pandemic did have an adverse impact on our earnings and resulted in an increase to the allowance for loan losses when compared to the same period in 2019.
We are unable to estimate the full impact of COVID-19 on our business and operations at this time. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be reopened. The pandemic could cause us to experience higher credit losses in our loan portfolio, impairment of our goodwill, reduced demand for our products and services, or other negative impacts on our financial position, results of operations, and prospects.
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in response to the coronavirus pandemic. This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the coronavirus pandemic.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The Fed has taken, and continues to take, steps to support markets and the economy. Stimulus from Washington and the federal government, in spite of political hurdles and a change in presidential administrations, has also provided meaningful support. The new Biden administration has proposed another $1.9 trillion stimulus package that is currently making its way through Congress. The market expects the Fed Funds rate to remain at the effective lower bound near zero for an extended period of time. Henceforth, the Fed appears to be willing to let inflation run above the 2% target level, even when unemployment is very low, before removing accommodation.
The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” (“TDR”) accounting guidance in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Company has assessed which loans qualify for this treatment. The CARES Act also permits the Bank to continue to accrue interest on loans that have received deferral treatment as a result of the pandemic. In addition, on April 7, 2020, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs.
On August 3, 2020, the Federal Financial Institutions Council issued a joint statement, encouraging financial institutions to consider prudent accommodation options to mitigate losses for the borrower and financial institution beyond the initial accommodation period. The joint statement specifically encourages financial institutions to provide consumers with available options for repaying missed payments at the end of their accommodation to avoid delinquencies, as well as options for changes to terms to support sustainable and affordable payments for the long term. These considerations should also include prudent risk management practices at the financial institution based on the credit risk of the borrower. Patriot is actively working with its customers to address any further accommodation needs while carefully evaluating the associated credit risk of the borrowers.
Summary of Significant Accounting Policies:
Principles of consolidation and basis of financial statement presentation
The consolidated financial statements include the accounts of Patriot, and the Bank's wholly owned subsidiaries, PinPat Acquisition Corporation and have been prepared in conformity with US GAAP. All significant intercompany balances and transactions have been eliminated.
Cash and cash equivalents
Patriot considers all short-term, highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and due from banks, federal funds sold, and short-term investments are recognized as cash equivalents in the consolidated balance sheets.
Patriot maintains amounts due from banks which, at times, may exceed federally insured limits. Patriot has not experienced any losses from such concentrations.
Federal Reserve Bank and Federal Home Loan Bank stock
The Bank is required to maintain an investment in capital stock of the Federal Home Loan Bank of Boston (“FHLB-B”), as collateral, in an amount equal to a percentage of its outstanding mortgage loans and loans secured by residential properties, including mortgage-backed securities. Additionally, the Bank is required to maintain an investment in the capital stock of the Federal Reserve Bank (“FRB”), as collateral, in an amount equal to one percent of six percent of the Bank’s total equity capital as per its latest Report of Condition (“Call Report”) filed with the Federal Deposit Insurance Corporation. The FRB requires that one-half of the investment in its stock be funded currently, with the remaining amount subject to call when deemed necessary by the FRB Board of Governors.
Shares in the FHLB-B and FRB are purchased and redeemed based upon their $100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost, and evaluated for impairment in accordance with relevant accounting guidance. In accordance with this guidance, the stocks’ values are determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as: (a) the significance of any decline in net assets of the FHLB-B or FRB, as applicable, compared to its capital stock amount, and the length of time this situation has persisted; (b) commitments by either the FHLB-B or FRB to make payments required by law or regulation and the level of such payments in relation to their operating performance; (c) the potential impact of any legislative or regulatory changes; and (d) the regulatory capital ratios and liquidity position of the FHLB-B or FRB, as applicable.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Included in the Bank’s investment portfolio are shares in the FHLB-B and FRB of $7.3 million and $7.4 million as of December 31, 2020 and 2019, respectively. Management has evaluated its investment in the capital stock of the FHLB-B and FRB for impairment, based on the aforementioned criteria, and has determined that as of December 31, 2020 and 2019 there is no impairment of its investment in either the FHLB-B or FRB.
Investment Securities
Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date.
Debt securities, if any, that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and are recorded at amortized cost. “Trading” securities, if any, are carried at fair value with unrealized gains and losses recognized in earnings. Securities classified as “available-for-sale” are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes. Purchase premiums and discounts are recognized in interest income using the interest method of accounting, in order to achieve a constant effective yield over the contractual term of the securities.
Patriot conducts a quarterly review and evaluation of the securities portfolio to determine if a decline in the fair value of any security below its cost basis is an other-than-temporary impairment (“OTTI”). Our evaluation of OTTI considers the duration and severity of the impairment, our intent to hold the securities, whether or not we will be required to sell the securities, and our assessments of the reason for the decline in value and the likelihood of a near-term recovery. If such decline is deemed to be an OTTI, the security is written down to its fair value, which becomes its new cost basis, and the resulting loss is charged to earnings as a component of non-interest income. Other than the credit loss portion, OTTI on a debt security that we have the intent and ability to hold until recovery of its amortized cost is recognized in other comprehensive income/loss, net of applicable taxes. The credit loss portion of OTTI (i.e., any losses resulting from an inability to collect on the instrument) is charged against earnings.
Securities transactions are recorded on the trade date. Realized gains and losses on the sale of securities are determined using the specific identification method, recorded on the trade date, and reported in non-interest income for the period.
At December 31, 2020 and 2019, the Bank’s investment portfolio includes a $4.5 million investment in the Solomon Hess SBA Loan Fund (“SBA Fund”). The Bank uses this investment to satisfy its Community Reinvestment Act lending requirements. At December 31, 2020 and 2019, the investment in the SBA Fund is reported in the consolidated balance sheets at cost, which management believes approximates fair value.
Loans receivable
Loans that Patriot has the intent and ability to hold until maturity or for the foreseeable future generally are reported at their outstanding unpaid principal balances adjusted for unearned income, an allowance for loan and lease losses, if any, and any unamortized discount, premium and deferred fees.
Interest income is accrued based on unpaid principal balances. Loan application fees are reported as non-interest income, while other certain direct origination costs, or for purchased loans, any discounts or premiums are deferred and amortized to interest income as a level yield adjustment over the respective term of the loan.
Loans are placed on non-accrual status or charged off when collection of principal or interest is considered doubtful. The accrual of interest on loans is discontinued no later than when the loan is 90 days past due for payment, unless the loan is well secured and in process of collection. Consumer installment loans are typically charged off no later than when they become 180 days past due. Past due status is based on the contractual terms of the loan.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Accrued uncollected interest income on loans that are placed on non-accrual status or have been charged off is reversed against interest income. 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, New York. Accordingly, the ultimate collectability of a substantial portion of Patriot’s loan portfolio is susceptible to regional real estate market conditions.
A loan is considered impaired when, based on current information and events, it is probable that Patriot will be unable to collect the scheduled payments of principal or interest when due, according to the loan’s contractual terms. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration the circumstances contributing to the borrower’s loan performance issues, including the length of the delay, the reasons for the delay, the borrower’s prior payment history, and the amount of the shortfall in relation to the principal and interest owed. For commercial and real estate loans, impairment is measured for each individual loan based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or, for collateral dependent loans, the fair value of the collateral less applicable selling costs.
Impaired loans also include loans modified in troubled debt restructurings (“TDR”), where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment or maturity date extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. TDRs are generally placed on non-accrual status until the loan qualifies for return to accrual status. Loans qualify for return to accrual status once they have demonstrated compliance with the restructured terms of the loan agreement and have performed for a minimum of six months.
Lower balance lending arrangements, such as consumer installment loans, are evaluated for impairment by pooling the loans into homogenous groupings. Accordingly, Patriot does not separately identify individual consumer installment loans for impairment, unless such loans are individually evaluated for impairment due to financial difficulties of the borrower.
Acquired Loans
Acquired loans are initially recorded at their acquisition date fair values. The carryover of allowance for loan and lease losses is prohibited as any credit losses in the acquired loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Acquired Impaired Loans- Purchase Credit Impaired “PCI” Loans
Acquired loans that exhibit evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments are accounted for as PCI loans under Accounting Standards Codification (“ASC”) 310-30. The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is accreted into interest income over the remaining life of the loans using the interest method. The difference between contractually required payments at acquisition and the undiscounted cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses and other contractually required payments that the Company does not expect to collect. Subsequent decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan and lease losses. Subsequent improvements in expected cash flows result in a recovery of previously recorded allowance for loan and lease losses or a reversal of a corresponding amount of the non-accretable discount, which the Company then reclassifies as an accretable discount that is accreted into interest income over the remaining life of the loans using the interest method.
PCI loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, the associated allowance for credit losses related to these loans is not carried over at the acquisition date.
Acquired loans that met the criteria for non-accrual of interest prior to acquisition were not considered performing upon acquisition. When the customers resume payments, to make the nonaccrual loans current, the loans may return to accrual status, including the impact of any accretable discounts, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans.
Acquired Non-impaired Loans
Acquired loans that do not meet the requirements under ASC 310-30 are considered acquired non-impaired loans. The difference between the acquisition date fair value and the outstanding balance represents the fair value adjustment for a loan and includes both credit and interest rate considerations. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to net interest income (or expense) over the loan’s remaining life in accordance with ASC 310-20. Fair value adjustments for revolving loans are accreted (or amortized) using a straight-line method. Term loans are accreted (or amortized) using the constant effective yield method.
Subsequent to the purchase date, the methods used to estimate the allowance for loan and lease losses for the acquired non-impaired loans are consistent with the policy for allowance for loan and lease losses described below.
Allowance for loan and lease losses
The allowance for loan and lease losses (“ALLL”) is regularly evaluated by management, based upon the nature and volume of the loan portfolio, periodic review of loan collectability using historical experience rates, adverse situations potentially affecting individual borrowers’ ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions on overall segments of the loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The non-specific ALLL by loan segment is calculated using a systematic methodology, consisting of a quantitative and qualitative analytical component, applied on a quarterly basis to homogeneous loans. The model is comprised of six distinct loan portfolio segments: Commercial Real Estate, Residential Real Estate, Commercial and Industrial, Consumer and Other, Construction, and Construction to Permanent - Commercial Real Estate (“Construction to permanent - CRE”). Management monitors a distinct set of risk characteristics for each loan segment. Additionally, management assesses and monitors risk and performance on a disaggregated basis, including an internal risk rating system for loans included in the Commercial loan segment and analyzing the type of collateral, lien position, and loan-to-value (i.e., LTV) ratio for loans included in the Consumer loan segment.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Management’s ALLL process first applies historical loss rates to pools of loans with homogeneous risk characteristics. Loss rates are calculated by historical charge-off rates that have occurred within each pool of homogenous loans over its loss emergence period (“LEP”). The LEP is an estimate of the average amount of time from the point at which a loan loss is incurred to the point in time at which the loan loss is confirmed. In general, the LEP will be shorter in an economic slowdown or recession and longer during times of economic stability or growth, when adverse conditions are not generally applicable across a class of borrowers and individual customers are better able to manage deteriorating conditions.
Another key assumption is the look-back period (“LBP”), which represents the historical data period utilized to calculate loss rates. A three-year LBP is used for each loan segment, in order to capture relevant historical data believed to reflect losses inherent in the loan segment portfolios.
After considering the historic loss calculations, management applies additional qualitative adjustments to the ALLL to reflect the inherent risk of loss that exists in the loan portfolio at the balance sheet date. Qualitative adjustments are made based upon changes in economic conditions, loan portfolio and asset quality data, and credit process changes, such as credit policies or underwriting standards. Evaluation of the ALLL requires considerable judgment, in order to adequately estimate and provide for the risk of loss inherent in the loan portfolio segments.
Qualitative adjustments are aggregated into the eleven categories described in the Interagency Policy Statement (“Interagency Statement”) issued by the bank regulators. Within the statement, the following qualitative factors are considered:
●
Changes in lending policies and procedures, including underwriting standards, collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
●
Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments;
●
Changes in the nature and volume of the loan portfolio and terms of loans;
●
Changes in the experience, ability and depth of lending management and staff;
●
Changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans;
●
Changes in the quality of the loan review system;
●
Changes in the value of the underlying collateral for collateral-dependent loans;
●
The existence and effect of any concentrations of credit and changes in the level of such concentrations;
●
The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our current loan portfolio;
●
An additional risk factor for special mention loans and substandard loans, which is designed to approximate the additional risk of these assets and is based on industry data; and
●
An additional risk factor related to COVID-19 pandemic, which is designed to absorb probable incurred loan losses that are negatively affected by the COVID-19 pandemic. This factor is derived from an analysis of total loans currently deferred under the COVID-19 deferral policies and their related collateral position.
Patriot provides for loan losses by consistently applying the documented ALLL methodology. Loan losses are charged to the allowance as incurred and recoveries are credited to the ALLL. Additions to the ALLL are charged against income, based on various factors which, in management’s judgment, deserve current recognition in estimating probable losses. Loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. Generally, Patriot will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated fair value of the underlying collateral, less costs to sell, for collateral dependent loans. Subsequent recoveries, if any, are credited to the ALLL. Patriot regularly reviews the loan portfolio and makes adjustments for loan losses, in order to maintain the allowance for loan and lease losses in accordance with US GAAP.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The allowance for loan and lease losses consists primarily of the following three components:
(1)
Allowances are established for impaired loans (generally defined by Patriot as non-accrual loans and troubled debt restructured loans). The amount of impairment provided as an allowance is represented by the deficiency, if any, between the present value of expected future cash flows discounted at the loan’s original effective interest rate or the underlying collateral value, less estimated costs to sell, if the loan is collateral dependent, and the carrying value of the loan. Impaired loans that have no discounted cash flow or collateral deficiency, if applicable, are not considered for general valuation allowances described below.
(2)
General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired. The portfolio is grouped into homogeneous risk characteristics, primarily loan type and, if collateral dependent, LTV ratio. Management applies an estimated loss rate to each pool of homogeneous loans. The loss rates applied are based on Patriot’s three-year loss LBP adjusted, as appropriate, for the factors discussed above. The evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions. Actual loan losses may be more or less than the ALLL management established which could have an effect on Patriot’s financial results.
In addition, a risk rating system is utilized to evaluate the general component of the ALLL. Under this system, management assigns risk ratings between one and eleven. Risk ratings are assigned based upon the recommendation of the credit analyst and the originating loan officer. The risk ratings are reviewed and confirmed by the management loan committee of the Board of Directors (the “Loan Committee”). Risk ratings are established at the initiation of transactions and are reviewed and changed, when necessary, during the life of the loan. Loans assigned a risk rating of six or above are monitored more closely by the credit administration officers and the Loan Committee.
(3)
An unallocated component of the ALLL is considered when necessary to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the ALLL reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies applied to estimating specific and general losses in the loan portfolio.
In underwriting a loan secured by real property, a property appraisal is required to be performed by an independent licensed appraiser that has been approved by Patriot’s Board of Directors. Appraisals are subject to review by independent third parties hired by Patriot. All appraisals are reviewed by qualified independent parties to the firm preparing the appraisals. Generally, management obtains updated appraisals when a loan is deemed impaired. These appraisals may be more limited than those prepared for the underwriting of a new loan. Additionally, Management reviews and inspects properties before disbursing funds, during the term of a construction loan.
The Bank further segmented its loan pools by Pass, Special Mention, and Substandard risk ratings and assigned additional risk premiums to each group. The qualitative and economic factors for all of the pools and subsegments were also evaluated, with Pass loans receiving adjustments to reflect their credit profile relative to the non-impaired criticized assets. These adjustments generally flow through the qualitative factors addressing severity of past due loans and other similar conditions and the nature and volume of the portfolio and terms of the loans.
The Bank’s leveraged lending portfolio was evaluated relative to the rest of the Commercial & Industrial (“C&I”) pool, and an additional risk premium was assigned to those loans in aggregate, and is reflected in the commercial and industrial category in the ALLL calculation. These loans were isolated due their risk parameters and profile, including higher leverage than the rest of the Bank’s C&I portfolio.
The Bank’s SBA loan portfolio consists of the unguaranteed portion of certain C&I and Owner-Occupied CRE loans. An additional risk premium was assigned to those loans due to their risk parameters and profile, including higher historical loss rates (based on historical SBA data) than the rest of the C&I and Owner-Occupied CRE portfolio.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
In 2020, the Company changed its methodology to estimate its allowance for loan losses. Management has added a qualitative risk factor adjustment related to COVID-19 pandemic to absorb probable incurred loan losses that are inherent in the pooled loans portfolio.
The change in methodology resulted in better alignment of the credit characteristics of the various risk grades and loan types with the calculated allowance. The provision of $2.2 million in 2020 incorporated these changes.
Acquired loans are marked to fair value on the date of acquisition and are evaluated on a quarterly basis to ensure the necessary purchase accounting updates are made in parallel with the allowance for loan loss calculation. Acquired loans that have been renewed since acquisition are included in the allowance for loan loss calculation since these loans have been underwritten to the Bank’s guidelines. Acquired loans that have not been renewed since acquisition, or that have a PCI mark, are excluded from the allowance for loan loss calculation.
While Patriot uses the best information available to evaluate the ALLL, future adjustments to the ALLL may be necessary if conditions differ or substantially change from the information used in making the evaluation. In addition, as an integral part of its regulatory examination process, the OCC will periodically review the ALLL. The OCC may require Patriot to adjust the ALLL based on its analysis of information available at the time of its examination.
Transfers of financial assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from Patriot -- put presumptively beyond the reach of Patriot and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and no condition both constrains the transferee from taking advantage of that right and provides more than a trivial benefit for Patriot, and (3) Patriot does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates it to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.
Loans Held for Sale
Loans held for sale represent the guaranteed portion of Small Business Administration (“SBA”) loans and are reflected at the lower of aggregate cost or market value. Patriot originates loans to customers under a SBA program that historically has provided for SBA guarantees of 75 percent of the principal balance of each loan. Patriot generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the unguaranteed portion in its portfolio. The amount of loan origination fees is included in the carrying value of loans sold and in the calculation of the gain or loss on the sale. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets, less the discount of the retained portion of the loan are recognized in income. All criteria for sale accounting must be met in order for the loan sales to occur; see details under the “Transfers of Financial Assets” heading above.
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.
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 ALLL. Thereafter, an allowance for OREO losses is established for any further declines in the property’s value. These losses are included in non-interest expenses in the consolidated statements of operations.
Premises and equipment
Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Leasehold improvements are capitalized and amortized over the shorter of the terms of the related leases or the estimated economic lives of the improvements. Depreciation is charged to operations for buildings, furniture, equipment and software using the straight-line method over the estimated useful lives of the related assets which range from three to forty years. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized.
Impairment of long-lived assets
Long-lived assets, which are held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to non-interest expense.
Intangible Assets
Intangible assets include core deposit intangibles (“CDI”) and goodwill arising from acquisitions. The initial and ongoing carrying value of intangible assets is based upon modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows. It also requires use of a discount rate that reflects the current return requirements of the market in relation to present risk-free interest rates, required equity market premiums, peer volatility indicators, and company-specific risk indicators.
CDI is amortized on straight-line basis over a 10-year period because that is managements’ estimate of the period Patriot will benefit from Prime Bank’s deposit base comprised of funds associated with long-term customer relationships. CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.
The Company evaluates goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The annual impairment test is conducted annually as of October 31, or whenever certain triggering events occur or there are circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount are identified. Management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the Company, assumptions within the capitalization rate, valuation multiples, and market data used. The fair value of each reporting unit is compared to the carrying amount of such reporting unit in order to determine if impairment is indicated.
Contingent Consideration
Contingent consideration represents an estimate of the additional amount of purchase price consideration and is measured based on the probability that certain loans are restructured in accordance with the related acquisition agreement. Resolution of the contingent consideration was finalized as of December 31, 2020 and no further adjustments are expected.
Derivatives
Patriot enters into interest rate swap agreements (“swaps”), to provide a facility to mitigate for the borrower the fluctuations in the variable rate on the respective loan. The customer swaps are simultaneously hedge by offsetting derivatives that Patriot entered into with an outside third party. The swaps are reported at fair value in other assets or other liabilities. Patriot’s swaps qualify as derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income.
The credit risk associated with derivatives executed with customers is similar as that involved in extending loans and is subject to normal credit policies. Collateral is obtained based on management’s assessment of the customer. The positions of customer derivatives are recorded at fair value and changes in value are included in noninterest income on the consolidated statement of operations.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
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. Based upon this evidence, management recorded a valuation allowance of $1.9 million as of December 31, 2020. See Note 14 for more information on the deferred tax valuation allowance.
Management will continue to evaluate its ability to realize the net deferred tax asset. Future evidence may indicate that it is more likely than not that a portion of the net deferred tax asset will not be realized at which point the valuation allowance may need to be increased.
Patriot had a net deferred tax asset of $11.5 million at December 31, 2020 as compared to a net deferred tax asset of $11.1 million at December 31, 2019.
On March 27, 2020, the CARES Act was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, and modifications to the net interest deduction limitations. While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s income taxes or related disclosures.
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 2018 through 2020 are subject to examination by the Internal Revenue Service (“IRS”) for U.S. Federal tax purposes and, for State tax purposes, by the Department of Revenue Services for the State of Connecticut and the State of New York Department of Taxation and Finance.
As of December 31, 2020 and 2019, the Bank recorded an uncertain tax position (“UTP”) related to the utilization of certain federal net operating losses of $0 and $1.2 million, respectively. Additionally, Patriot has no pending or on-going audits in any tax jurisdiction.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.
Earnings per Share
Basic earnings per share represents earnings accruing to common shareholders and are computed by dividing net income by the weighted average number of common shares outstanding.
Diluted earnings per share reflects additional common shares that would have been outstanding if potentially dilutive securities had been converted to common stock, as well as any adjustments to earnings resulting from the assumed conversion, unless such effect is anti-dilutive. Potential common shares that may be issued by Patriot include any unvested restricted stock awards, stock options, and stock warrants and are determined using the treasury stock method.
Share-based compensation plan
Incentive and compensatory share-based compensation granted to employees is accounted for at the grant date fair value of the award and recognized in the results of operations as compensation expense with an off-setting entry to equity on a straight-line basis over the requisite service period, which is the vesting period. Non-employee members of the Board of Directors are treated as employees for any share-based compensation granted in exchange for their service on the Board of Directors.
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, 2020, 2019 and 2018, this segment represented all the revenues and income of Patriot.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Reserve for Unfunded Commitments
The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments to lend. The unfunded reserve calculation includes factors that are consistent with the ALLL methodology for our loan portfolio as well as a draw down factor applied to the various commitments. The reserve for unfunded commitments is included within other liabilities in the accompanying consolidated balance sheets, and changes in the reserve are reported as a component of other expense in the accompanying consolidated statements of operations. See Note 18: Financial Instruments with Off-Balance-Sheet Risk for further information.
Related Party Transactions
Directors and officers of the Company and their affiliates have been customers of and have had transactions with the Company, and it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not directors or officers. In the opinion of management, the transactions with related parties did not involve more than normal risks of collectability, nor favored treatment or terms, nor present other unfavorable features. See Note 20: Related Party Transactions for further information.
Fair value
Patriot uses fair value measurements to record adjustments to the carrying amounts of certain assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate sale or settlement of the asset or liability, respectively.
Provided in these notes to the consolidated financial statements is a detailed summary of Patriot’s application of fair value measurements and the effect on the assets and liabilities presented in the consolidated financial statements.
Advertising Costs
Patriot's policy is to expense advertising costs in the period in which they are incurred.
Project expenses
Project expenses represent non-recurring expenses, primarily legal and consulting not directly related to the core business of Community Banking. In 2020, the project expenses consist of a final purchase price adjustment expense of $556,000 related to the Prime acquisition in May 2018. In 2019, the project expenses principally were the result of third party costs related to a formal written agreement (the “Formal Agreement”) with the OCC entered in November 2018, and of a non-recurring nature and primarily consultants and legal. In prior years, the expenses were primarily for merger, tax analysis strategy and planning.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
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 U.S. GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of non-interest income are as follows:
●
Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
Recently Adopted and Issued Accounting Standards
Accounting Standards Adopted During 2020
Effective January 1, 2020, the following new Accounting Standards Updates (ASUs) were adopted by the Company:
ASU 2018-13
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements. This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The amendments related to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented upon their effective date. The adoption of ASU 2018-13 did not have any impact on our consolidated financial statements.
ASU 2018-15
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). For public business entities, the ASU was effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted.
The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update.
The amendments in this ASU also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The term of the hosting arrangement includes the non-cancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor. The entity also is required to apply the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived assets.
The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the consolidated balance sheets in the same line item that a repayment for the fees of the associated hosting arrangement would be presented.
The adoption of ASU 2018-15 did not have a significant impact on our consolidated financial statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update.
The amendments in this ASU also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The term of the hosting arrangement includes the non-cancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor. The entity also is required to apply the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived assets.
The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the consolidated balance sheets in the same line item that a repayment for the fees of the associated hosting arrangement would be presented.
The adoption of ASU 2018-15 did not have a significant impact on our consolidated financial statements.
Accounting Standards Issued But Not Yet Adopted
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU changes the methodology for measuring credit losses on financial instruments measured at amortized cost to a current expected loss (“CECL”) model. Under the CECL model, entities will estimate credit losses over the entire contractual term of a financial instrument from the date of initial recognition of the instrument. The ASU also changes the existing impairment model for available-for-sale debt securities. In cases where there is neither the intent nor a more-likely-than-not requirement to sell the debt security, an entity will record credit losses as an allowance rather than a direct write-down of the amortized cost basis. Additionally, ASU 2016-13 notes that credit losses related to available-for-sale debt securities and purchased credit impaired loans should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018. In November 2019, the FASB issued ASU 2019-10, which amends the effective date of ASC 326 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities, and delays the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a small reporting company, the delay will be applicable to the Company. Management is currently evaluating the impact that the standard will have on its consolidated financial statements.
ASU 2019-12
ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The ASU is effective for the Company on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our financial statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
ASU Update 2020-02
In January 2020, the FASB issued ASU No. 2020-02, “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. See the discussion regarding the adoption of ASU 2016-13 above.
ASU Update 2020-03
In March 2020, the FASB issued ASU No. 2020-3, “Codification Improvements to Financial Instruments.” This ASU clarifies various financial instruments topics, including the CECL standard issued in 2016. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Other amendments are effective upon issuance of this ASU. See the discussion regarding the adoption of ASU 2016-13 above.
ASU Update 2020-04
In March 2020, the FASB issued ASU No. 2020-4, "Reference Rate Reform". This ASU provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. As of December 31, 2020, the Company has not made any elections under ASU 2020-04 but continues to evaluate the impact of reference rate reform and which optional expedients and exceptions might be elected.
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, 2020. In 2019, the Bank was not subject to a reserve requirement.
Note 3. Available-for-sale securities
At December 31, 2020 and 2019, the amortized cost, gross unrealized gains, gross unrealized losses and approximate fair value of available-for-sale securities was as follows:
(In thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Fair
Value
December 31, 2020:
U. S. Government agency mortgage-backed securities
$ 16,719
$
$ (17 )
$ 16,833
Corporate bonds
18,014
(984 )
17,290
Subordinated notes
9,036
(128 )
9,005
SBA loan pools
5,627
-
(60 )
5,567
Municipal bonds
-
$ 49,960
$
$ (1,189 )
$ 49,262
December 31, 2019:
U. S. Government agency mortgage-backed securities
$ 16,663
$
$ (68 )
$ 16,685
Corporate bonds
18,018
(838 )
17,313
Subordinated notes
9,022
-
9,204
SBA loan pools
5,157
-
(42 )
5,115
$ 48,860
$
$ (948 )
$ 48,317
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following table presents available-for-sale securities’ gross unrealized losses and fair value, aggregated by the length of time the individual securities have been in a continuous loss position as of December 31, 2020 and 2019:
(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, 2020:
U. S. Government agency mortgage-backed securities
$ 5,797
$ (14 )
$ 1,476
$ (3 )
$ 7,273
$ (17 )
Corporate bonds
-
-
13,015
(984 )
13,015
(984 )
Subordinated notes
1,878
(122 )
1,103
(6 )
2,981
(128 )
SBA loan pools
1,533
(12 )
4,034
(48 )
5,567
(60 )
$ 9,208
$ (148 )
$ 19,628
$ (1,041 )
$ 28,836
$ (1,189 )
December 31, 2019:
U. S. Government agency mortgage-backed securities
$ 2,609
$ (20 )
$ 3,919
$ (48 )
$ 6,528
$ (68 )
Corporate bonds
-
-
13,162
(838 )
13,162
(838 )
SBA loan pools
5,115
(42 )
-
-
5,115
(42 )
$ 7,724
$ (62 )
$ 17,081
$ (886 )
$ 24,805
$ (948 )
At December 31, 2020 and 2019, twenty-two of thirty-seven and fifteen of twenty-seven available-for-sale securities had unrealized losses with an aggregate depreciation of 4.0% and 3.7% from amortized cost, respectively.
Management believes that none of the losses on available-for-sale securities noted above constitute OTTI. The noted losses are considered temporary due to market fluctuations in available interest rates on U.S. Government agency debt, mortgage-backed securities issued by U.S. Government agencies, subordinated notes, corporate debt. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected. SBA government guaranteed loan pools securities were purchased at a premium and the unrealized loss was attributable primarily to increased prepayment speeds. The timely payment of principal and interest on these securities is guaranteed by the U.S. Government agency. The contractual terms of the subordinated notes do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Since Patriot is not more-likely-than-not to be required to sell the investments before recovery of the amortized cost basis and does not intend to sell the securities at a loss, none of the available-for-sale securities noted are considered to be OTTI as of December 31, 2020.
As of December 31, 2020 and 2019, available-for-sale securities of $6.1 million and $4.8 million were pledged primarily to secure municipal deposits, respectively. The securities were pledged to the Federal Reserve Bank (“FRB”).
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, 2020 and 2019. 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, 2020:
Corporate bonds
$ 4,014
$ 14,000
$ -
$ 18,014
$ 4,274
$ 13,016
$ -
$ 17,290
Subordinated notes
2,000
7,036
-
9,036
2,003
7,002
-
9,005
SBA loan pools
1,921
3,706
-
5,627
1,899
3,668
-
5,567
Municipal bonds
-
-
-
-
Available-for-sale securities with stated maturity dates
7,935
25,306
-
33,241
8,176
24,253
-
32,429
U. S. Government agency mortgage-backed securities
3,364
1,466
11,889
16,719
3,363
1,491
11,979
16,833
$ 11,299
$ 26,772
$ 11,889
$ 49,960
$ 11,539
$ 25,744
$ 11,979
$ 49,262
December 31, 2019:
Corporate bonds
$ 4,018
$ 14,000
$ -
$ 18,018
$ 4,151
$ 13,162
$ -
$ 17,313
Subordinated notes
-
9,022
-
9,022
-
9,204
-
9,204
SBA loan pools
-
5,157
-
5,157
-
5,115
-
5,115
Available-for-sale securities with stated maturity dates
4,018
28,179
-
32,197
4,151
27,481
-
31,632
U. S. Government agency mortgage-backed securities
3,805
2,047
10,811
16,663
3,810
2,016
10,859
16,685
$ 7,823
$ 30,226
$ 10,811
$ 48,860
$ 7,961
$ 29,497
$ 10,859
$ 48,317
Note 4. Loan Receivables and Allowance for Loan and Lease Losses
As of December 31, 2020 and 2019, loans receivable, net, consisted of the following:
December 31,
(In thousands)
Loan portfolio segment:
Commercial Real Estate
$ 282,378
$ 314,414
Residential Real Estate
153,851
175,489
Commercial and Industrial
144,297
173,875
Consumer and Other
67,635
85,934
Construction
66,984
48,388
Construction to Permanent - CRE
15,035
14,064
Loans receivable, gross
730,180
812,164
Allowance for loan and lease losses
(10,584 )
(10,115 )
Loans receivable, net
$ 719,596
$ 802,049
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Patriot's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York, and the five Boroughs of New York City. Patriot originates commercial real estate loans, commercial business loans, a variety of consumer loans, and construction loans, and has purchased residential loans since 2016. All commercial and residential real estate loans are collateralized primarily by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent to some degree on the status of the regional economy as well as upon the regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions.
Patriot has established credit policies applicable to each type of lending activity in which it engages and evaluates the creditworthiness of each borrower. Unless extenuating circumstances exist, Patriot limits the extension of credit on commercial real estate loans to 75% of the market value of the underlying collateral. Patriot’s loan origination policy for multi-family residential real estate is limited to 80% of the market value of the underlying collateral. In the case of construction loans, the maximum loan-to-value is 75% of the “as completed” appraised value of the real estate project. Management monitors the appraised value of collateral on an on-going basis and additional collateral is requested when warranted. Real estate is the primary form of collateral, although other forms of collateral do exist and may include such assets as accounts receivable, inventory, marketable securities, time deposits, and other business assets.
In May 2018, loans were acquired in connection with the Prime Bank merger. A subset of these loans was determined to have evidence of credit deterioration at the acquisition date, which was accounted for in accordance with ASC 310-30. The purchased credit impaired (“PCI”) loans presently maintain a carrying value of zero as of December 31, 2020 and $176,000 as of December 31, 2019, respectively. The loans were evaluated for impairment through the periodic reforecasting of expected cash flows.
Income is recognized on PCI loans pursuant to ASC Topic 310-30. A portion of the fair value discount has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected.
A summary of changes in the accretable discount for PCI loans for the year ended December 31, 2020, 2019 and 2018 follows:
(In thousands)
Year Ended December 31,
Accretable discount, beginning of period
$ (47 )
$ (792 )
$ (1,316 )
Accretion
Other changes, net
Accretable discount, end of period
$ -
$ (47 )
$ (792 )
The accretion of the accretable discount for PCI loans for the year end December 31, 2020, 2019 and 2018 was $2,000, $47,000 and $92,000, respectively. The other changes represent primarily loans that were either fully paid-off or totally charged off.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Risk characteristics of the Company’s portfolio classes include the following:
Commercial Real Estate Loans
In underwriting commercial real estate loans, Patriot evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loans. Repayment of such loans may be negatively impacted should the borrower default, the value of the property collateralizing the loan substantially decline, or there are declines in general economic conditions. Where the owner occupies the property, Patriot also evaluates the business’ ability to repay the loan on a timely basis and may require personal guarantees, lease assignments, and/or the guarantee of the operating company.
Residential Real Estate Loans
In 2013, Patriot discontinued offering primary mortgages on personal residences. Repayment of residential real estate loans and the loans secured by residential real estate may be negatively impacted should the borrower have financial difficulties, should there be a significant decline in the value of the property securing the loan, or should there be declines in general economic conditions.
In 2020 and 2019, Patriot purchased $17.9 million and $47.3 million of residential real estate loans, respectively.
Commercial and Industrial Loans
Patriot’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are generally for the financing of accounts receivable, purchases of inventory, purchases of new or used equipment, or for other short- or long-term working capital purposes. These loans are generally secured by business assets but are also occasionally offered on an unsecured basis. In granting these types of loans, Patriot considers the borrower’s cash flow as the primary source of repayment, supported by the value of collateral, if any, and personal guarantees, as applicable. Repayment of commercial and industrial loans may be negatively impacted by adverse changes in economic conditions, ineffective management, claims on the borrower’s assets by others that are superior to Patriot’s claims, a loss of demand for the borrower’s products or services, or the death or disability of the borrower or other key management personnel.
Patriot’s syndicated and leveraged loan portfolios totaled $55.0 million and $71.5 million at December 31, 2020 and 2019, respectively. The syndicated and leveraged loans are included in the commercial and industrial loan classification and are primarily comprised of loan transactions led by major financial institutions and regional banks, which are the Agent Bank or Lead Arranger, and are referred to as syndicated loans or "Shared National Credits (SNC)". SNC loans were determined to be complementary to the Bank’s existing commercial and industrial loan portfolio and product offerings and provide diversification from Patriot’s typical direct-to-business lines of credit and term facilities. The Bank will participate in senior secured financings for public and privately-owned companies for acquisitions, working capital, recapitalizations, and general corporate purposes. The Bank’s strategy is to participate in these types of loan transaction in accordance with its internal policies.
Consumer and Other Loans
Patriot offers individual consumers various forms of credit including installment loans, credit cards, overdraft protection, auto loans, and reserve lines of credit. Repayments of such loans are generally dependent on the personal income of the borrower, which may be negatively impacted by adverse changes in economic conditions. The Company does not place a high emphasis on originating these types of loans.
The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories that are typically characterized by payment delinquencies, previous charge-offs, judgments against the consumer, a history of bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.
During 2020 and 2019, $14.9 million and $7.3 million education loans were purchased, respectively.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Construction Loans
Construction loans are of a short-term nature, generally of eighteen months or less, that are secured by land and improvements intended for commercial, residential, or mixed-use development. Loan proceeds may be used for the acquisition of or improvements to the land under development and funds are generally disbursed as phases of construction are completed.
Included in this category are loans to construct single family homes where no contract of sale exists, based upon the experience and financial strength of the builder, the type and location of the property, and other factors. Construction loans tend to be personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by an inability to complete construction, a downturn in the market for new construction, by a significant increase in interest rates, or by decline in general economic conditions.
Construction to Permanent - Commercial Real Estate (“CRE”)
Loans in this category represent a one-time close of a construction facility with simultaneous conversion to an amortizing mortgage loan. Construction to Permanent loans combine a short term period similar to a construction loan, generally with a variable rate, and a longer term CRE loan typically 20-25 years, resetting every five years to the Federal Home Loan Bank (“FHLB”) rate.
Close of the construction facility typically occurs when events dictate, such as receipt of a certificate of occupancy and property stabilization, which is defined as cash flow sufficient to support a pre-defined minimum debt coverage ratio and other conditions and covenants particular to the loan. Construction 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 percent of the principal balance. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the unguaranteed portion held in the portfolio as a loan held for investment. 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 $21.6 million and $9.6 million at December 31, 2020 and 2019, respectively.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Allowance for Loan and Lease Losses
The following tables summarize the activity in the allowance for loan and lease losses, allocated to segments of the loan portfolio, for each year in the three-year period ended December 31, 2020:
(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, 2020
Allowance for loan and lease losses:
December 31, 2019
$ 3,789
$ 1,038
$ 4,340
$
$
$
$ -
$ 10,115
Charge-offs
(1,032 )
(24 )
(677 )
(45 )
-
-
-
(1,778 )
Recoveries
-
-
-
-
Provisions (credits)
1,728
(449 )
(7 )
2,170
December 31, 2020
$ 4,485
$ 1,379
$ 3,284
$
$
$
$
$ 10,584
As of and for the year ended December 31, 2019
Allowance for loan and lease losses:
December 31, 2018
$ 1,866
$ 1,059
$ 3,558
$
$
$
$
$ 7,609
Charge-offs
-
(118 )
(2,418 )
(123 )
-
-
-
(2,659 )
Recoveries
-
-
-
Provisions (credits)
1,921
3,028
(187 )
(27 )
4,971
December 31, 2019
$ 3,789
$ 1,038
$ 4,340
$
$
$
$ -
$ 10,115
As of and for the year ended December 31, 2018
Allowance for loan and lease losses:
December 31, 2017
$ 2,212
$
$ 2,023
$
$
$
$ -
$ 6,297
Charge-offs
-
(2 )
-
(33 )
-
-
-
(35 )
Recoveries
-
-
-
Provisions (credits)
(353 )
1,501
(131 )
1,303
December 31, 2018
$ 1,866
$ 1,059
$ 3,558
$
$
$
$
$ 7,609
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following tables summarize, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for impairment as of December 31, 2020 and 2019:
(In thousands)
Commercial
Real Estate
Residential
Real Estate
Commercial
and
Industrial
Consumer
and
Other
Construction
Construction
to
Permanent
- CRE
Unallocated
Total
December 31, 2020
Allowance for loan and lease losses:
Individually evaluated for impairment
$ 1,398
$
$ -
$
$ -
$ -
$ -
$ 1,412
Collectively evaluated for impairment
3,087
1,375
3,284
9,172
Total allowance for loan and lease losses
$ 4,485
$ 1,379
$ 3,284
$
$
$
$
$ 10,584
Loans receivable, gross:
Individually evaluated for impairment
$ 14,534
$ 3,962
$ 4,700
$ 1,187
$ -
$ -
$ -
$ 24,383
Collectively evaluated for impairment
267,844
149,889
139,597
66,448
66,984
15,035
-
705,797
Total loans receivable, gross
$ 282,378
$ 153,851
$ 144,297
$ 67,635
$ 66,984
$ 15,035
$ -
$ 730,180
(In thousands)
Commercial
Real Estate
Residential
Real Estate
Commercial
and
Industrial
Consumer
and
Other
Construction
Construction
to
Permanent
- CRE
Unallocated
Total
December 31, 2019
Allowance for loan and lease losses:
Individually evaluated for impairment
$ 1,496
$ -
$ -
$ -
$ -
$ -
$ -
$ 1,496
Collectively evaluated for impairment
2,293
1,038
4,340
-
8,619
Total allowance for loan losses
$ 3,789
$ 1,038
$ 4,340
$
$
$
$ -
$ 10,115
Loans receivable, gross:
Individually evaluated for impairment
$ 13,034
$ 3,621
$ 2,057
$
$ -
$ -
$ -
$ 19,628
PCI loans individually evaluated for impairment
-
-
-
-
-
-
Collectively evaluated for impairment
301,380
171,868
171,642
85,018
48,388
14,064
-
792,360
Total loans receivable, gross
$ 314,414
$ 175,489
$ 173,875
$ 85,934
$ 48,388
$ 14,064
$ -
$ 812,164
Patriot monitors the credit quality of its loans receivable on an ongoing basis. Credit quality is monitored by reviewing certain indicators, including cash flow from business operations, loan to value ratios, debt service coverage ratios, and credit scores.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Patriot employs a risk rating system as part of the risk assessment of its loan portfolio. At origination, lending officers are required to assign a risk rating to each loan in their portfolio, which is ratified or modified by the Loan Committee to which the loan is submitted for approval. If financial developments occur on a loan in the lending officer’s portfolio of responsibility, the risk rating is reviewed and adjusted, as applicable. In carrying out its oversight responsibilities, the Loan Committee can adjust a risk rating based on available information. In addition, the risk ratings on all commercial loans over $250,000 are reviewed annually by the Credit Department.
Additionally, Patriot retains an independent third-party loan review expert to perform a quarterly analysis of the results of its risk rating process. The quarterly review is based on a randomly selected sample of loans within established parameters (e.g., value, concentration), in order to assess and validate the risk ratings assigned to individual loans. Any changes to the assigned risk ratings, based on the quarterly review, are required to be approved by the Loan Committee.
When assigning a risk rating to a loan, management utilizes the Bank’s internal eleven-point risk rating system. An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the Company to sufficient risk to warrant classification in one of the following categories:
●
Substandard: An asset is classified “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets have well defined weaknesses based on objective evidence, and are characterized by the distinct possibility that the Company will sustain some loss, if noted deficiencies are not corrected.
●
Doubtful: Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard”, with the added characteristic that the identified weaknesses make collection or liquidation-in-full improbable, on the basis of currently existing facts, conditions, and values.
Charge-offs of loans to reduce the loan to its recoverable value that are solely collateral dependent, generally occur immediately upon confirmation of the partial loss amount. Loans that are cash flow dependent are modeled to reflect the expected cash flows through expected loan maturity, including any proceeds from refinancing or principal curtailment. A specific reserve is established for the amount by which the net investment in the loan exceeds the present value of discounted cash flows. Charge-offs on cash flow dependent loans also generally occur immediately upon confirmation of the partial loss amount.
If either type of loan is classified as “Loss”, meaning full loss on the loan is expected, the full balance of the loan receivable is charged off, regardless of the potential recovery from a sale of the underlying collateral. Any amount that may be recovered on the sale of collateral underlying a loan is recognized as a “recovery” in the period in which the collateral is sold. In accordance with Federal Financial Institutions Examination Council published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” and “Closed-end” credits are charged off when 180 days and 120 days delinquent, respectively.
Due to the economic disruption and uncertainty caused by the pandemic, the allowance for loan losses may increase in future periods as borrowers are affected by the expected severe contraction of economic activity and the dramatic increase in unemployment. This may result in increases in loan delinquencies, down-grades of loan credit ratings and charge-offs in future periods. The allowance for loan losses may increase to reflect the decline in the performance of the loan portfolio and the higher level of incurred losses.
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, 2020.
Performing (Accruing) Loans
As of December 31, 2020:
30 - 59 Days
Past Due
60 - 89 Days
Past Due
90 Days
or
Greater Past
Due
Total
Past Due
Current
Total
Performing
Loans
Non-
accruing
Loans
Loans
Receivable
Gross
Loan portfolio segment:
Commercial Real Estate:
Pass
$ -
$ -
$ -
$ -
$ 230,824
$ 230,824
$ -
$ 230,824
Special mention
-
-
-
-
25,658
25,658
-
25,658
Substandard
-
10,999
11,362
14,534
25,896
-
267,481
267,844
14,534
282,378
Residential Real Estate:
Pass
-
145,298
146,137
-
146,137
Special mention
-
-
-
-
3,860
3,860
-
3,860
Substandard
-
-
-
-
-
-
3,854
3,854
-
149,158
149,997
3,854
153,851
Commercial and Industrial:
Pass
-
-
102,131
102,340
-
102,340
Special mention
-
4,000
-
4,000
8,881
12,881
-
12,881
Substandard
-
27,660
28,376
29,076
4,322
-
4,925
138,672
143,597
144,297
Consumer and Other:
Pass
-
66,589
66,597
-
66,597
Substandard
-
-
-
-
1,038
-
66,710
66,718
67,635
Construction:
Pass
-
2,351
-
2,351
64,633
66,984
-
66,984
-
2,351
-
2,351
64,633
66,984
-
66,984
Construction to Permanent - CRE:
Pass
-
-
-
-
15,035
15,035
-
15,035
-
-
-
-
15,035
15,035
-
15,035
Total
$ 1,436
$ 7,034
$
$ 8,486
$ 701,689
$ 710,175
$ 20,005
$ 730,180
Loans receivable, gross:
Pass
$
$ 2,921
$
$ 3,407
$ 624,510
$ 627,917
$ -
$ 627,917
Special mention
-
4,000
-
4,000
38,399
42,399
-
42,399
Substandard
1,079
38,780
39,859
20,005
59,864
Loans receivable, gross
$ 1,436
$ 7,034
$
$ 8,486
$ 701,689
$ 710,175
$ 20,005
$ 730,180
PATRIOT NATIONAL BANCORP, INC. 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, 2019.
(In thousands)
Performing (Accruing) Loans
As of December 31, 2019:
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
$ -
$ -
$ -
$ -
$ 295,982
$ 295,982
$ -
$ 295,982
Special mention
-
-
-
-
-
Substandard
-
-
-
-
6,086
6,086
11,961
18,047
-
-
-
-
302,453
302,453
11,961
314,414
Residential Real Estate:
Pass
-
-
169,903
170,561
-
170,561
Substandard
-
-
-
-
1,700
1,700
3,228
4,928
-
-
171,603
172,261
3,228
175,489
Commercial and Industrial:
Pass
-
162,711
163,388
-
163,388
Special mention
-
-
-
Substandard
-
-
-
-
7,942
7,942
2,094
10,036
-
170,825
171,781
2,094
173,875
Consumer and Other:
Pass
2,805
2,827
82,341
85,168
-
85,168
Substandard
-
-
-
-
-
-
2,805
2,827
82,341
85,168
85,934
Construction:
Pass
-
-
-
-
48,388
48,388
-
48,388
-
-
-
-
48,388
48,388
-
48,388
Construction to Permanent - CRE:
Pass
-
-
-
-
14,064
14,064
-
14,064
-
-
-
-
14,064
14,064
-
14,064
Total
$ 4,069
$
$
$ 4,441
$ 789,674
$ 794,115
$ 18,049
$ 812,164
Loans receivable, gross:
Pass
$ 3,790
$
$
$ 4,162
$ 773,389
$ 777,551
$ -
$ 777,551
Special mention
-
-
-
Substandard
-
-
-
-
15,728
15,728
18,049
33,777
Loans receivable, gross
$ 4,069
$
$
$ 4,441
$ 789,674
$ 794,115
$ 18,049
$ 812,164
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, 2020 and 2019:
(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, 2020:
Loan portfolio segment:
Commercial Real Estate:
Substandard
$ -
$ -
$ 5,723
$ 5,723
$ 8,811
$ 14,534
Residential Real Estate:
Substandard
-
-
2,884
2,884
3,854
Commercial and Industrial:
Substandard
-
-
-
Consumer and Other:
Substandard
-
Total non-accruing loans
$
$ -
$ 9,398
$ 9,420
$ 10,585
$ 20,005
As of December 31, 2019:
Loan portfolio segment:
Commercial Real Estate:
Substandard
$ -
$ -
$ 1,636
$ 1,636
$ 10,325
$ 11,961
Residential Real Estate:
Substandard
-
-
1,872
1,872
1,356
3,228
Commercial and Industrial:
Substandard
-
-
1,724
1,724
2,094
Consumer and Other:
Substandard
-
-
Total non-accruing loans
$ -
$ -
$ 5,381
$ 5,381
$ 12,668
$ 18,049
If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $904,000, $302,000, and $503,000 would have been recognized in income for the years ended December 31, 2020, 2019, and 2018, respectively.
Interest income collected and recognized on non-accruing loans for the year ended December 31, 2020 and 2019 was $156,000 and $671,000, respectively. No interest income was collected and recognized on non-accruing loans during 2018.
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.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
All interest accrued, but not collected for loans that are placed on non-accrual status or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, future payments are reasonably assured, after at least six months of timely payment history. Management considers all non-accrual loans and Trouble Debt Restructurings (“TDR”) for impaired loans. In most cases, loan payments that are past due less than 90 days, well-secured, and in the process of collection are not considered impaired. The Bank considers consumer installment loans to be pools of smaller homogeneous loan balances, which are collectively evaluated for impairment.
Troubled Debt Restructurings (“TDR”)
On a case-by-case basis, Patriot may agree to modify the contractual terms of a borrower’s loan to assist customers who may be experiencing financial difficulty. If the borrower is experiencing financial difficulties and a concession has been made, the loan is classified as a TDR.
Substantially all TDR loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below market rate, an extension of the term of the loan, or a combination of adjusting these two contractual attributes. TDR loan modifications may also result in the forgiveness of principal or accrued interest. In addition, when modifying commercial loans, Patriot frequently obtains additional collateral or guarantor support. If the borrower has performed under the existing contractual terms of the loan and Patriot’s underwriters determine that the borrower has the capacity to continue to perform under the terms of the TDR, the loan continues accruing interest. Non-accruing TDRs may be returned to accrual status when there has been a sustained period of performance (generally six consecutive months of payments) and both principal and interest are reasonably assured of collection.
The recorded investment in TDRs as of December 31, 2020 and 2019 were $11.9 million and $11.0 million, respectively.
(In thousands)
December 31, 2020
December 31, 2019
Loan portfolio segment:
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
Commercial Real Estate
$ 9,884
$ 9,873
Residential Real Estate
Commercial and Industrial
4,000
-
-
Consumer and Other
1,074
Total TDR Loans
15,886
10,953
Less:
TDRs included in non-accrual loans
(11,508 )
(9,337 )
Total accrual TDR Loans
$ 4,378
$ 1,616
The following loans were modified as TDR during the year ended December 31, 2020 and 2019.
Outstanding Recorded Investment
(In thousands)
Number of Loans
Pre-Modification
Post-Modification
Year Ended December 31,
Loan portfolio segment:
Commercial Real Estate
$
$ 8,912
$
$ 8,911
Commercial and Industrial
-
4,000
-
4,000
-
Consumer and Other
-
-
$
-
Total TDR Loans
$ 5,235
$ 8,912
$ 5,233
$ 8,911
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following table provides information on how loans were modified as TDRs during the year ended December 31, 2020 and 2019.
Year Ended December 31,
(In thousands)
Rate reduction
$ 4,819
$
Extension of interest only period
-
Payment deferral
-
Maturity and rate reduction
-
8,800
Total
$ 5,233
$ 8,911
During the years ended December 31, 2018, no loans were modified as TDRs, and no defaults of TDRs.
The loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, extending payment periods for the interest and /or principal, or substituting or adding a co-borrower or guarantor.
At December 31, 2020 and 2019, there were no commitments to advance additional funds under TDRs. The balances reflected here as TDR’s are also included in the non-accruing loan balance included in the prior table - Loan Portfolio Aging Analysis.
Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In addition, on April 7, 2020, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs. The Bank had modified $232.4 million of loans to borrowers to defer the payment of interest and/or principal for up to 180 days, and approximately $52.6 million of loans remained on deferment as of December 31, 2020. According to regulatory guidance and CARES Act, these modified loans were not TDRs as of December 31, 2020, other than those that had been classified as TDRs prior to the deferral provided under the CARES Act.
Impaired Loans
Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs. As of December 31, 2020 and 2019, based on the on-going monitoring and analysis of the loan portfolio, impaired loans of $24.4 million and $19.6 million, respectively, were identified, for which $1.4 million and $1.5 million specific reserves were established, respectively. Loans not requiring specific reserves had fair values exceeding the total recorded investment, supporting the net investment in the loan which includes principal balance, unamortized fees and costs and accrued interest, if any. Once a borrower is in default, Patriot is under no obligation to advance additional funds on unused commitments.
At December 31, 2020 and 2019, exposure to the impaired loans was related to 26 and 27 borrowers, respectively. For collateral dependent loans, appraisal reports of the underlying collateral, have been obtained from independent licensed appraisal firms. For non-performing loans, the independently determined appraised values were first reduced by a discount to reflect the Bank’s experience selling Other Real Estate Owned (OREO) properties, and were further reduced by 8% in selling costs, in order to estimate the potential loss, if any, that may eventually be realized. As of December 31, 2020, the discount rate was reduced to 5.8% as compared to 12% in 2019. The change in accounting estimate reduced loan charge-offs by $266,000 for the year ended December 31, 2020. Performing loans are monitored to determine when, if at all, additional loan loss reserves may be required for a loss of underlying collateral value. For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate.
PCI loans acquired from Prime Bank acquisition were originally recorded at fair value by the Bank on the date of acquisition. As of December 31, 2020 and December 31, 2019, PCI loans remaining balance was $0 and $179,000, respectively. Those loans were considered individually evaluated for impairment, with no allowance recorded.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following table reflects information about the impaired loans, excluding PCI loans, by class as of December 31, 2020 and 2019:
(In thousands)
December 31, 2020
December 31, 2019
Recorded
Investment
Principal
Outstanding
Related
Allowance
Recorded
Investment
Principal
Outstanding
Related
Allowance
With no related allowance recorded:
Commercial Real Estate
$ 5,723
$ 6,644
$ -
$ 4,234
$ 4,309
$ -
Residential Real Estate
3,853
3,900
-
3,621
3,623
-
Commercial and Industrial
4,700
4,816
-
2,057
2,060
-
Consumer and Other
1,177
1,332
-
1,000
-
15,453
16,692
-
10,828
10,992
-
With a related allowance recorded:
Commercial Real Estate
$ 8,811
$ 8,811
$ 1,398
8,800
8,800
1,496
Residential Real Estate
-
-
-
Consumer and Other
-
-
-
8,930
8,930
1,412
8,800
8,800
1,496
Impaired Loans, Total:
Commercial Real Estate
14,534
15,455
1,398
13,034
13,109
1,496
Residential Real Estate
3,962
4,009
3,621
3,623
-
Commercial and Industrial
4,700
4,816
-
2,057
2,060
-
Consumer and Other
1,187
1,342
1,000
-
Impaired Loans, Total
$ 24,383
$ 25,622
$ 1,412
$ 19,628
$ 19,792
$ 1,496
For each year in the three-year period ended December 31, 2020, the average recorded investment in and interest income recognized on impaired loans without and with a related allowance, by loan portfolio segment, was as follows:
Year Ended December 31,
(In thousands)
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
$ 5,859
$
$ 9,829
$
$ 3,318
$
Residential Real Estate
3,681
2,531
3,154
Commercial and Industrial
2,111
1,800
-
Consumer and Other
1,132
Construction
-
-
4,062
-
1,354
12,783
19,123
9,563
With a related allowance recorded:
Commercial Real Estate
8,861
-
-
Residential Real Estate
-
-
Commercial and Industrial
-
-
1,714
-
-
Consumer and Other
-
-
-
8,934
3,572
-
Impaired Loans, Total:
Commercial Real Estate
14,720
10,717
3,318
Residential Real Estate
3,715
3,483
3,280
Commercial and Industrial
2,111
3,514
1,461
-
Consumer and Other
1,171
Construction
-
-
4,062
-
1,354
Impaired Loans, Total
$ 21,717
$
$ 22,695
$
$ 10,172
$
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 5. Loans Held for Sale
SBA loans held for sale represent the guaranteed portion of SBA loans originated and are reflected at the lower of aggregate cost or market value. As of December 31, 2020, SBA loans held for sale consisted of $1.2 million of SBA commercial and industrial loans. There were $15.3 million of SBA loans held for sale at December 31, 2019, consisting of $10.2 million SBA commercial and industrial loans and $5.1 million SBA commercial real estate loans. During 2020, $9.5 million SBA loans previously classified as held for sale were transferred to held for investment.
In September 2020, one commercial and industrial loan of $5.0 million was reclassed from loans held for investment to loans held for sale. The loan was sold in October 2020 which resulted in proceeds of $5.0 million.
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 $19.4 million and $13.6 million at December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the servicing asset has a carrying value of $316,000 and $201,000, respectively, and fair value of $375,000 and $280,000, respectively. Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets.
The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 31, 2020, 2019 and 2018:
(In thousands)
Year Ended December 31,
Beginning balance
$
$
$ -
Servicing rights capitalized
Servicing rights amortized
(22 )
(16 )
(5 )
Ending balance
$
$
$
The servicing assets are included in the other assets on the consolidated balance sheets.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 6. Premises and Equipment
At December 31, 2020 and 2019, premises and equipment consisted of the following:
(In thousands)
December 31,
Land
$ 12,819
$ 12,819
Buildings
20,287
20,287
Leasehold Improvements
4,024
4,024
Furniture, equipment, and software
12,010
11,687
Construction-in-progress
Premises and equipment, gross
49,202
48,867
Accumulated depreciation and amortization
(15,779 )
(14,299 )
Premises and equipment, net
$ 33,423
$ 34,568
For the years ended December 31, 2020, 2019 and 2018, depreciation and amortization expense related to premises and equipment totaled $1.5 million, $1.6 million, and $1.5 million, respectively.
Note 7. Other Real Estate Owned (“OREO”)
As of December 31, 2020 and 2019, OREO aggregated of $1.9 million and $2.4 million, respectively. The 2020 OREO balance consists of foreclosed residential properties from one loan receivable that is currently being marketed for sale as two properties. In 2020, Patriot sold one residential property of $446,000 and recognized a loss of $21,000. There was a write-down of $48,000 for the remaining OREO as of December 31, 2020, which is included in the non-interest expense on the consolidated statements of operations. In 2019, Patriot sold one residential property of $991,000 acquired in connection with the acquisition of Prime Bank and recognized a loss of $94,000. The recognized loss is included in the other operating expenses on the consolidated statements of operations.
Note 8. Business Combination, Goodwill and Other Intangible Assets
Acquisition of Prime Bank
The Company’s acquisitions are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. At date of acquisition fair values are generally preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding fair values becomes available.
On May 10, 2018, the Company completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT. The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut.
The assets acquired and liabilities assumed from Prime Bank were recorded at their estimated fair value as of the closing date of the acquisition. Goodwill of $2.1 million was recorded at the time of the acquisition, and was adjusted to $1.7 million as of December 31, 2018, primarily due to updating of fair value of the core deposit intangibles and adjustment of cash and contingent considerations. The goodwill was further adjusted to $1.1 million as a result of reducing the estimated amount to be paid pursuant to certain problem loans pending resolution by $621,000 as of May 10, 2019.
For the year ended December 31, 2020, a purchase price adjustment of $556,000 was recognized to project expenses on the consolidated statements of operations. The charge represented an adjustment to the earlier estimate of the final purchase price upon final settlement of the litigation related to a dispute over the final purchase price. There were no income statement effects resulting from the recorded measurement period adjustments for the year ended December 31, 2019. The goodwill is all deductible for income taxes over 15 years.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Information on goodwill for the year ended December 31, 2020, 2019 and 2018 is as follows:
Year Ended December 31,
(In thousands)
Balance, beginning of period
$ 1,107
$ 1,728
$ 1,728
Mesurement period adjustments
-
(621 )
-
Balance, end of period
$ 1,107
$ 1,107
$ 1,728
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 identified the COVID-19 pandemic and related reported losses as a triggering event in the first quarter of 2020. Due to this triggering event, the Company performed a quantitative assessment of the goodwill, and concluded it was more likely than not that the fair value of the reporting unit exceeded its carrying value, and goodwill was not impaired. The Company performed a quantitative assessment as of October 31, 2020, the Company’s annual goodwill impairment measurement date, and concluded that the goodwill was not impaired as of December 31, 2020.
CDI was recorded as part of the Prime Bank business combination in May 2018. The CDI is amortized over a 10-year period using the straight-line method. For the year ended December 31, 2020, 2019 and 2018, the amortization was $74,000, $75,000 and $50,000, respectively. The CDI was evaluated for impairment as of October 31, 2020, and an impairment charge of $206,000 was recorded for the year ended December 31, 2020. The amortization expense and impairment charge were included in the other operating expenses on the consolidated statements of operations.
The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the dates set forth below.
Year Ended December 31,
(In thousands)
Gross Intangible asset
$
$
$
Accumulated amortization
(199 )
(125 )
(50 )
Impairment
(206 )
-
-
Core deposit intangible, net
$
$
$
Acquisition of Hana Small Business Lending and Subsequent Termination
On February 6, 2018, the Company, Hana Small Business Lending, Inc. (“Hana SBL”), a wholly-owned subsidiary of Hana Financial, Inc. (“Hana Financial”), and three wholly-owned subsidiaries of Hana SBL entered into a definitive purchase agreement pursuant to which Patriot would acquire Hana SBL’s small business administration (“SBA”) lending business.
On August 2, 2018, the Company, Hana SBL and three wholly-owned subsidiaries of Hana SBL, entered into an amendment to the purchase agreement, pursuant to which, the closing date of the above referenced transaction had been extended from August 2, 2018 to August 1, 2019.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
On October 29, 2018 the Company withdrew its initial application to the OCC requesting approval of the acquisition of Hana SBL. As of March 30, 2019, the Company did not receive regulatory non-objection.
On March 30, 2019 the Company and Hana SBL mutually agreed to terminate the purchase agreement as amended between the parties. The termination agreement provided for the release of escrowed funds back to the Company.
For the year ended December 31, 2018, the Company incurred $1.15 million of merger and acquisition expenses related to the Hana SBL acquisition.
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, 2020 and 2019.
December 31,
(In thousands)
Balance
Weighted
Avg. Stated
Interest Rate
Balance
Weighted
Avg. Stated
Interest Rate
Non-interest bearing
$ 158,676
-
$ 88,135
-
Interest bearing:
NOW
30,529
0.07 %
26,864
0.08 %
Savings
98,635
0.36 %
64,020
0.76 %
Money market
146,389
0.45 %
99,115
1.85 %
Certificates of deposit, less than $250,000
160,968
0.78 %
193,942
2.19 %
Certificates of deposit, $250,000 or greater
49,172
0.79 %
67,550
2.48 %
Brokered deposits
41,287
1.93 %
229,909
2.01 %
Interest bearing, Total
526,980
0.66 %
681,400
1.89 %
Total Deposits
$ 685,656
0.51 %
$ 769,535
1.68 %
On July 22, 2020, the Company completed the purchase of prepaid debit card deposits of $50.0 million from a prominent national provider and processor of prepaid debit cards for corporate, consumer and government clients. The prepaid debit card deposits totaled approximately $59.3 million as of December 31, 2020, which is included in the non-interest bearing deposits.
The following table presents interest expense, by deposit category, and the related weighted average effective interest rate for each of the years in the three-year period ended December 31, 2020.
(In thousands)
Year ended December 31,
Interest
Expense
Weighted
Avg. Effective
Interest Rate
Interest
Expense
Weighted
Avg. Effective
Interest Rate
Interest
Expense
Weighted
Avg. Effective
Interest Rate
NOW
$
0.07 %
$
0.07 %
$
0.06 %
Savings
0.54 %
0.63 %
0.85 %
Money market
1,451
1.05 %
2,048
2.00 %
1.34 %
Certificates of deposit, less than $250,000
3,227
1.75 %
4,986
2.38 %
3,048
1.57 %
Certificates of deposit, $250,000 or greater
1,188
1.95 %
1,546
2.01 %
1,226
1.68 %
Brokered deposits
2,839
1.88 %
4,958
2.47 %
3,191
1.91 %
$ 9,154
1.43 %
$ 13,985
2.05 %
$ 9,024
1.46 %
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
As of December 31, 2020, contractual maturities of Certificates of Deposit (“CDs”) and brokered deposits are summarized as follows:
(In thousands)
CDs
less than
$250,000
CDs
$250,000
or greater
Brokered
Deposits
Total
1 year or less
$ 137,051
$ 41,794
$ 35,690
$ 214,535
More than 1 year through 2 years
19,602
6,178
5,347
31,127
More than 2 years through 3 years
2,655
-
3,601
More than 3 years through 4 years
1,069
-
1,319
More than 4 years through 5 years
-
$ 160,968
$ 49,172
$ 41,287
$ 251,427
Note 10. Borrowings
As of December 31, 2020 and 2019, total borrowings were $120.8 million and $130.9 million, respectively. Borrowings consist primarily of FHLB advances, senior notes, subordinated notes, junior subordinated debentures and a note payable.
The senior notes, subordinated notes, junior subordinated debentures contain affirmative covenants that require the Company to: maintain its and its subsidiaries’ legal entity and tax status, pay its income tax obligations on a timely basis, and comply with SEC and FDIC reporting requirements.
Federal Home Loan Bank borrowings
The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). Borrowings from the FHLB-B are limited to a percentage of the value of qualified collateral, as defined on the FHLB-B Statement of Products Policy. Qualified collateral, as defined, primarily consists of mortgage-backed securities and loans receivable that are required to be free and clear of liens and encumbrances, and may not be pledged for any other purposes. As of December 31, 2020, the Bank had $63.9 million of available borrowing capacity from the FHLB-B.
FHLB-B advances are structured to facilitate the Bank’s management of its balance sheet and liquidity requirements. At December 31, 2020 and 2019, outstanding advances from the FHLB-B aggregated $90.0 million and $100.0 million, respectively.
At December 31, 2020, advances of $90.0 million outstanding bore fixed rates of interest ranging from 2.40% to 4.23% with maturities ranging from 2.5 years to 3.7 years. The FHLB-B advances with fixed interest rates have a weighted average interest rate of 3.26%.
At December 31, 2020, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $267.5million. Borrowing capacity under this line totaled $78.4 million at December 31, 2020.
In addition, Patriot has a $2.0 million revolving line of credit with the FHLB-B. At December 31, 2020 and 2019, no funds had been borrowed under the line of credit.
Interest expense incurred for FHLB-B borrowing for the year ended December 31, 2020, 2019 and 2018 were $2.7 million, $2.2 million and $1.6 million respectively.
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, 2020 and 2019, borrowings available under the agreements totaled $5 million and $5 million, respectively. The purpose of the agreements is to provide a credit facility intended to satisfy overnight federal account balance requirements and to provide for daily settlement of FRB, ACH, and other clearinghouse transactions.
There was no outstanding balance under the agreements at December 31, 2020 and 2019. Interest expense incurred for the year ended December 31, 2019 and 2018 was $2,000 and $13,000, respectively. No interest expense incurred in 2020.
Other Borrowing
In August 2020, Patriot was approved to pledge commercial and industrial loans and leases, commercial real estate, construction loans and one-to-four family first lien loans under the Federal Reserve Bank of New York’s (“FRBNY”) Borrower-in-Custody program. As of December 31, 2020, Patriot had pledged eligible loans with a book value of $40.9 million and a collateral value of $26.3 million as collateral to support borrowing capacity at the FRBNY. There was no outstanding balance under the agreements as of December 31, 2020.
Senior notes
On December 22, 2016, the Company issued $12 million of senior notes bearing interest at 7% per annum and maturing on December 22, 2021 (the “Senior Notes”). Interest on the Senior Notes is payable semi-annually on June 22 and December 22 of each year beginning on June 22, 2017.
In connection with the issuance of the Senior Notes, the Company incurred $374,000 of costs, which are being amortized over the term of the Senior Notes to recognize a constant rate of interest expense. At December 31, 2020 and 2019, $73,000 and $147,000 of unamortized debt issuance costs have been deducted from the face amount of the Senior Notes included in the consolidated balance sheet.
The Senior Notes are unsecured, rank equally with all other senior obligations of the Company, are not redeemable nor may they be put to the Company by the holders of the notes, and require no payment of principal until maturity.
For the year ended December 31, 2020, 2019 and 2018, the Company recognized interest expense of $915,000 for each of the three years, at an effective rate of 7.6%, which amount is greater than the stated interest rate on the Senior Notes due to debt issuance cost amortization expense of $75,000 for each of the three years. As of December 31, 2020 and 2019, $23,000 and $23,000 of interest has been included in the consolidated balance sheet in accrued expenses and other liabilities, respectively.
Subordinated notes
On June 29, 2018, the Company entered into certain subordinated note purchase agreements with two institutional accredited investors and completed a private placement of $10 million of fixed-to-floating rate subordinated notes with the maturity date of September 30, 2028 (the “Subordinated Notes”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder.
The Subordinated Notes initially bear interest at 6.25% per annum, from and including June 29, 2018, to but excluding, June 30, 2023, payable semi-annually in arrears. From and including June 30, 2023, until but excluding June 30, 2028 or an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR (but not less than zero) plus 332.5 basis points, payable quarterly in arrears. The Company may, at its option, beginning on June 30, 2023 and on any scheduled interest payment date thereafter, redeem the Subordinated Notes. Interest on the Subordinated Notes is payable beginning on December 30, 2018.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
In connection with the issuance of the Subordinated Notes, the Company incurred $291,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense. At December 31, 2020 and 2019, $218,000 and $248,000 of unamortized debt issuance costs have been deducted from the face amount of the Subordinated Notes included in the consolidated balance sheet, respectively. For the year ended December 31, 2020, 2019 and 2018, the Company recognized interest expense of $654,000, $656,000 and $327,000, respectively.
Junior subordinated debt owed to unconsolidated trust
In 2003, the Patriot National Statutory Trust I (“the Trust”), which has no independent assets and is wholly-owned by the Company, issued $8.0 million of trust preferred securities. The proceeds, net of a $240,000 placement fee, were invested in junior subordinated debentures issued by the Company, which invested the proceeds in the Bank. The Bank used the proceeds to fund its operations.
Trust preferred securities currently qualify for up to 25% of the Company’s Tier I Capital, with the excess qualifying as Tier 2 Capital.
The junior subordinated debentures are unsecured obligations of the Company. The debentures are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. In addition to its obligations under the junior subordinated debentures and in conjunction with the Trust, the Company issued an unconditional guarantee of the trust preferred securities.
The junior subordinated debentures bear interest at three-month LIBOR plus 3.15% (3.4% at December 31, 2020) 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, 2020 and 2019, $8,000 and $8,000 of debt placement fee amortization has been included in interest expense recognized of $337,000 and $462,000, respectively. As of December 31, 2020, 2019 and 2018, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $138,000, $146,000 and $154,000, respectively, and accrued interest on the junior subordinated debentures was $5,000 and $6,000, respectively.
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.
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, 2020 and 2019, the note had a balance outstanding of $994,000 and $1.2 million, respectively. The note matures in August 2024 and requires a balloon payment of approximately $234,000. The note is secured by a first Mortgage Deed and Security Agreement on the purchased property. Interest expenses incurred for the year ended December 31, 2020, 2019 and 2018 were $19,000, $23,000 and $26,000, respectively.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Maturity of borrowings
At December 31, 2020, the contractual maturities of the Company’s borrowings in future periods were as follows:
(In thousands)
Year ending December 31,
FHLB
Borrowings
Senior
Notes
Subordinated
Notes
Junior
Subordinated
Debt
Note
Payable
Total
$ -
$ 12,000
$ -
$ -
$
$ 12,202
-
-
-
-
60,000
-
-
-
60,210
30,000
-
-
-
30,376
-
-
-
-
-
-
Thereafter
-
-
10,000
8,248
-
18,248
Total contractual maturities of borrowings
90,000
12,000
10,000
8,248
121,242
Unamortized debt issuance costs
-
(73 )
(218 )
(138 )
-
(429 )
Balance of borrowings as of December 31, 2020
$ 90,000
$ 11,927
$ 9,782
$ 8,110
$
$ 120,813
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 11. Derivatives
Patriot is a party to interest rate swaps; derivatives that are not designated as hedging instruments. Under a program, Patriot will execute interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Patriot executes with a third party, such that Patriot minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties.
Patriot entered the two initial interest rate swaps under the program in November 2018; and another two swaps were entered into in May 2019. As of December 31, 2020 and 2019, Patriot had cash pledged for collateral on its interest rate swaps of $1.4 million and $1.1 million, respectively. This collateral is included in other assets on the consolidated balance sheets. The Company recognized $30,000 gain on the swaps for the year ended December 31, 2019. No gain on the swaps was recognized for the year ended December 31, 2020 and 2018.
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, 2020
Classified in Other Assets:
Customer interest rate swap
$ 4,911
8.3
5.25 %
1 Mo. LIBOR + 1.96%
$
Customer interest rate swap
1,431
8.5
4.38 %
1 Mo. LIBOR + 2.00%
Classified in Other Liabilities:
3rd party interest rate swap
$ 4,911
8.3
5.25 %
1 Mo. LIBOR + 1.96%
$ (997 )
3rd party interest rate swap
1,431
8.5
4.38 %
1 Mo. LIBOR + 2.00%
(190 )
December 31, 2019:
Classified in Other Assets:
Customer interest rate swap
$ 4,944
9.3
5.25 %
1 Mo. LIBOR + 1.96%
$
Customer interest rate swap
1,444
9.5
4.38 %
1 Mo. LIBOR + 2.00%
Classified in Other Liabilities:
3rd party interest rate swap
$ 4,944
9.3
5.25 %
1 Mo. LIBOR + 1.96%
$ (617 )
3rd party interest rate swap
1,444
9.5
4.38 %
1 Mo. LIBOR + 2.00%
(77 )
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. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
Patriot has ten non-cancelable operating leases, including four Bank branch locations and four for administrative and operational space, one ITM location, and one equipment lease. The leases expire on various dates through 2032 and some include renewal options. Most of the leases contain rent escalation provisions, as well as renewal options for one or more periods. The last potential year the leases can be extended through 2037. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheets as a right-of-use (“ROU”) asset and a corresponding lease liability. Renew periods were included in the future cashflows for purposes of calculating the ROU and lease liability. The Company has no finance leases (previously referred to as a capital lease).
Operating leases are recorded as a ROU lease assets and are included in other assets on the consolidated balance sheet. The Company’s corresponding lease obligations are included in accrued expenses and other liabilities on the consolidated balance sheet. ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
As of December 31, 2020 and 2019, the Company recognized ROU assets of $2.7 million and $3.2 million, respectively, and lease liabilities of $2.9 million and $3.3 million, respectively, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets. At the time of adoption on January 1, 2019, a cumulative-effect adjustment of $11,000 was recorded to the accumulated deficit on the consolidated balance sheets.
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, 2020, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $565,000 and $38,000, respectively. For the year ended December 31, 2019, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $517,000 and $27,000, respectively.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following is a maturity analysis of the operating lease liabilities as of December 31, 2020:
(in thousands)
Operating lease
Years ending December 31,
Obligation
$
Thereafter
1,325
Total undiscounted lease payments
$ 3,417
Less imputed interest
(552 )
Present value of operating lease liabilities
$ 2,865
Operating lease right-of-use asset
$ 2,739
Year Ended December 31,
Lease cost
Operating lease cost
$
$
Short-term lease cost
Total lease cost
$
$
Other information
Operating cash flows from operating leases
$
$
December 31,
Weighted -average remaining lease term - operating leases (in years)
Weighted -average discount rate - operating leases
3.48 %
3.48 %
As of December 31, 2020 and 2019, the undiscounted lease payments were $3.4 million and $3.9 million, respectively. The lease payments were not reduced by minimum sublease rentals of $1.7 million and $2.0 million due in the future under non-cancelable subleases, respectively.
Rent expense for operating leases is recognized in earnings on a straight-line basis over the base term of the respective lease and is included in the consolidated statement of operations as a component of Occupancy and Equipment expense. For the years ended December 31, 2020, 2019 and 2018, total rent expense for cancellable and non-cancellable operating leases was $583,000, $636,000, and $593,000, respectively.
For the years ended December 31, 2020, 2019 and 2018, Patriot recognized gross rental income of $523,000, $589,000, and $413,000 offset by rental costs of $5,000, $5,000, and $5,000, respectively.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 13. Commitments and Contingencies
Employment Agreements
The Company has a severance agreement for certain Executive Vice Presidents that provides for severance equal to 12 months of current salary, if the EVP is terminated within 12 months of a change of control of Patriot.
Legal Matters
Patriot does not have any pending legal proceedings, other than ordinary routine litigation, incidental to its business, to which Patriot is a party or any of its property is subject. Management is of the opinion that the ultimate disposition of these routine legal matters will not have a material adverse effect on the consolidated financial condition, results of operations, or liquidity of Patriot.
Note 14. Income Taxes
Following is a summary of the components of the federal and state income tax expense (benefit) for each of the years in the three-year period ended December 31, 2020.
(In thousands)
Year Ended December 31,
Current:
Federal
$ (100 )
$
$
State
(14 )
1,155
Deferred:
Federal
(2,448 )
(698 )
State
2,125
(438 )
(413 )
(323 )
(1,136 )
(265 )
Income tax (benefit) expense
$ (337 )
$ (899 )
$
For each of the years in the three-year period ended December 31, 2020, the difference between the federal statutory income tax rate and Patriot’s effective income tax rate reconciles as follows:
(In thousands)
Year Ended December 31,
Income taxes at statutory Federal rate
$ (873 )
$ (780 )
$
State taxes, net of Federal benefit
(191 )
(228 )
Deferred tax valuation allowance
1,938
-
-
Reversal UTP on Federal DTA
(1,132 )
-
-
Nondeductible expenses
Benefit of change in Sec 382 classification
-
-
(500 )
Deferred tax adjustment resulting from tax rate change
-
-
Other
(87 )
Income tax (benefit) expense
$ (337 )
$ (899 )
$
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The effective tax rate for the years ended December 31, 2020, 2019 and 2018 was 8.1%, 24.2%, and 21.8%, respectively.
The decrease in the effective tax rate for 2020 was primarily due to the recoding of a deferred tax asset valuation allowance. There were no significant changes to the effective tax rate for 2019 and 2018.
The effective tax rate for 2018 was impacted by the reduction in the statutory Federal corporate tax rate to 21% from 34% that was effective January 1, 2018.
Deferred Tax Assets and Liabilities
The significant components of Patriot’s net deferred tax assets at December 31, 2020 and 2019 are presented below.
(In thousands)
December 31,
Deferred tax assets:
Federal NOL carryforward benefit
$ 4,576
$ 4,759
NOL write-off for Sec 382 Limit
(3,258 )
(3,258 )
Capitalized cost temporary item
3,627
3,929
State NOL carryforward benefit
3,306
3,341
Allowance for loan loss
3,869
2,718
Lease liabilities
Non-accrual interest
Merger and acquisition
Accrued expenses
Unrealized loss AFS securities
Share based compensation
Other
-
Gross deferred tax assets
14,061
13,193
Less deferred taxasset valuation allowance
(1,937 )
-
Total deferred tax assets
12,124
13,193
Deferred tax liabilities:
UTP (NOLs used)
-
(1,132 )
Right-of-Use assets
(736 )
(849 )
Goodwill and intangible
(40 )
Depreciation of premises and equipment
(32 )
(34 )
Other
(30 )
(5 )
Gross deferred tax liabilities
(628 )
(2,060 )
Net deferred tax asset
11,496
11,133
As of December 31, 2020, Patriot had available approximately $21.8 million of Federal net operating loss carryforwards (“NOL”) that is offset by $15.5 million in §382 limitations imposed by the Internal Revenue Code. Of the NOL of $21.8 million, approximately $20.2 million will expire between 2030 and 2033 and $1.6 million which do not expire.
Patriot has approximately $55.8 million of NOLs available for Connecticut tax purposes at December 31, 2020, which may be used to offset up to 50% of taxable income in any year. The NOLs expire between 2030 and 2039.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
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.
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. The valuation allowance at December 31, 2020 was primarily related to state net operating losses. Patriot will continue to evaluate the need for valuation allowances for its deferred tax assets.
During December 31, 2020, Patriot recorded a partial valuation allowance of $1.9 million primarily against its deferred tax asset related to state net operating loss carryforwards. For the year ended December 31, 2020 Patriot was in a cumulative loss position. In order to overcome this negative evidence Patriot reviewed its accumulated pre-tax income(loss) for the current and prior two- and three-year periods and adjusted for non-recurring items. After the adjustments, Patriot was no longer in a cumulative loss position. Patriot used the average adjusted pre-tax income for the current and prior three years as the basis for objectively estimating future taxable income. Secondly, Patriot has a tax planning strategy available under ASC 740 that would be implemented to prevent a carry-forward state net operating losses from expiring. The strategy consists of capitalizing loan costs to increase income and avoid state net operating losses from expiring unused.
As deferred tax assets associated with NOL carryforwards are already a direct reduction to Tier 1 Capital, the valuation allowance at December 31, 2020 had no impact on the Bank's regulatory capital position.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
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, 2020 and 2019, the Bank recorded an uncertain tax position related to the utilization of certain federal net operating losses of $0 and $1.2 million, respectively. At December 31, 2020 Patriot no longer has a liability for unrecognized tax benefits. Additionally, Patriot has no pending or on-going audits in any tax jurisdiction.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(In thousands)
Year Ended December 31,
Balance, beginning of year
$ 1,220
$ 1,132
$ -
Increases due to tax positions related to a prior year
1,132
Decreases to tax positions as a result of a lapse of statute
(1,285 )
-
-
Balance, end of year
$ -
$ 1,220
$ 1,132
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.
Patriot’s returns for tax years 2017 through 2020 are subject to examination by the IRS for U.S. 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.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 15. Share-based Compensation
The Company maintains the Patriot National Bancorp, Inc. 2012 Stock Plan (the “Plan”) to provide an incentive to directors and employees of the Company by the grant of restricted stock awards (“RSA”), options, or phantom stock units. Since 2013, the Company’s practice is to grant RSAs; as of December 31, 2020, there are no options or phantom stock units outstanding or that have been exercised.
The Plan provides for the issuance of up to 3,000,000 shares of the Company’s common stock subject to certain Plan limitations. As of December 31, 2020, 2,850,507 shares of stock remain available for issuance under the Plan. In accordance with the terms of the Plan, the vesting of RSAs and options may be accelerated at the discretion of the Compensation Committee of the Board of Directors. The Compensation Committee sets the terms and conditions applicable to the vesting of RSAs and stock option grants. RSAs granted to directors and employees generally vest in quarterly or annual installments over a three, four or five year period from the date of grant.
The following is a summary of the status of the Company’s restricted share awards as of and for each of the years in the three-year period ended December 31, 2020.
Number
of
Shares Awarded
Weighted Average
Grant Date
Fair Value
Unvested at December 31, 2017
25,870
$ 12.15
Granted
18,323
$ 18.07
Vested
(10,999 )
$ 16.21
Forfeited
(1,404 )
$ 14.44
Unvested at December 31, 2018
31,790
$ 14.06
Granted
9,675
$ 15.52
Vested
(19,995 )
$ 15.99
Unvested at December 31, 2019
21,470
$ 12.91
Granted
12,484
$ 6.12
Vested
(12,903 )
$ 13.82
Forfeited
(2,553 )
$ 15.86
Unvested at December 31, 2020
18,498
$ 7.29
The Company recognizes compensation expense for all director and employee share-based compensation awards on a straight-line basis over the requisite service period, which is equal to the vesting schedule of each award, for each vesting portion of an award equal to its grant date fair value. For the years ended December 31, 2020, 2019 and 2018, the Company recognized share-based compensation expense of $159,000, $214,000, and $220,000, respectively.
For the years ended December 31, 2020, 2019 and 2018, share-based compensation attributable to employees of Patriot amounted to $80,000, $117,000, and $135,000, respectively.
The share-based compensation expense attributable to Patriot’s external Directors for the years ended December 31, 2020, 2019, and 2018 was $79,000, $97,000, and $85,000, respectively. For each of those years, the Directors received total compensation of $429,000, $547,000, and $370,000, respectively, which amounts are included in Other Operating Expenses in the consolidated statements of operations.
Unrecognized compensation expense attributable to the unvested restricted shares outstanding as of December 31, 2020 amounted to $183,000, which amount is expected to be recognized over the weighted average remaining life of the awards of 1.85 years.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
RSA Grant - Non-executive Employees
On January 4, 2016, the Company granted 100 restricted shares to eighty-seven full- and part-time non-executive employees as of December 31, 2015. The total number of shares granted was 8,700 at a grant date fair value of $15.50 per share. Total 2,700 granted shares granted were forfeited. The remaining 6,000 shares were vested through the January 2019 vesting date.
Note 16. Shareholders’ Equity
Common Stock
On December 16, 2009, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with PNBK Holdings, LLC, a limited liability company controlled by Michael Carrazza (“Holdings”). Pursuant to the Securities Purchase Agreement, on October 15, 2010, the Company issued 3.36 million shares of common stock to Holdings at $15.00 per share, for an aggregate issuance value of $50.4 million. The shares issued to Holdings represented 87.6% of the Company’s then issued and outstanding common stock. In connection with the equity interest obtained by Holdings, Michael Carrazza became Patriot’s Chairman of the Board and nominees of Holdings replaced certain directors and officers who resigned. Holdings currently owns 56.7% of the Company’s issued and outstanding common stock.
Additionally, the Company reduced the par value of its common stock from $2 to $0.01 per share, increased the number of its authorized common shares to 100 million, and entered into a Registration Rights Agreement with Holdings. The Registration Rights Agreement provides Holdings with customary demand, shelf, and piggyback registration rights.
Dividends
The Company did not pay any dividends for the year ended December 31, 2020 and has temporarily suspended dividend payments pending resolution of the economic uncertainties associated with the Coronavirus pandemic. For the year ended December 31, 2019 and 2018, the Company paid cash dividends of $.01 per share of common stock, or an aggregate of $155,000 and $154,000, respectively.
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.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following is a summary of the computation of basic and diluted earnings per share for each of the years in the three-year period ended December 31, 2020.
(Net income in thousands)
Year ended December 31,
Basic (loss) earnings per share:
Net (loss) income attributable to Common shareholders
$ (3,819 )
$ (2,817 )
$ 3,196
Divided by:
Weighted average shares outstanding
3,934,886
3,921,783
3,904,052
Basic (loss) earnings per common share
$ (0.97 )
$ (0.72 )
$ 0.82
Diluted (loss) earnings per share:
Net (loss) income attributable to Common shareholders
(3,819 )
(2,817 )
3,196
Weighted average shares outstanding
3,934,886
3,921,783
3,904,052
Effect of potentially dilutive restricted common shares
- (1)
- (2)
11,573
Divided by:
Weighted average diluted shares outstanding
3,934,886
3,921,783
3,915,625
Diluted (loss) earnings per common share
$ (0.97 )
$ (0.72 )
$ 0.82
(1)
The weighted average diluted shares outstanding does not include 3,039 anti-dilutive restricted common shares for the year ended December 31, 2020.
(2)
The weighted average diluted shares outstanding does not include 3,555 anti-dilutive restricted common shares for the year ended December 31, 2019.
Note 17. 401(k) Savings Plan
Patriot offers employees participation in the Patriot Bank, N.A. 401(k) Savings Plan (the "401(k) Plan") under Section 401(k) of the Internal Revenue Code, along with the ROTH feature to the Plan. The 401(k) Plan covers substantially all employees who have completed one month of service, are 21 years of age and who elect to participate. Under the terms of the 401(k) Plan, participants can contribute up to the maximum amount allowed, subject to Federal limitations. At its discretion, Patriot may match eligible participating employee contributions at the rate of 50% of the first 6% of the participants’ salary contributed to the 401(k) Plan. Eligibility for matching contributions is dependent on an employee’s completing 6 consecutive month(s) of service or 500 hours of employment. Participants immediately vest in Patriot’s matching contributions, if applicable. During the years ended December 31, 2020, 2019, and 2018, Patriot made matching contributions to the 401(k) Plan of $253,000, $251,000, and $204,000, respectively.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 18. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Bank is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contractual amounts of these instruments reflect the extent of involvement Patriot has in particular classes of financial instruments.
The contractual amounts of commitments to extend credit and standby letters of credit represent the maximum amount of potential accounting loss should: the contract be fully drawn upon; the customer default; and the value of any existing collateral becomes worthless. Patriot applies its credit policies to entering commitments and conditional obligations and, as with its lending activities, evaluates each customer's creditworthiness on a case-by-case basis. Management believes that it effectively mitigates the credit risk of these financial instruments through its credit approval processes, establishing credit limits, monitoring the on-going creditworthiness of recipients and grantees, and the receipt of collateral as deemed necessary.
At December 31, 2020 and 2019, financial instruments with credit risk are as follows:
December 31,
(In thousands)
Commitments to extend credit:
Unused lines of credit
$ 61,622
$ 71,101
Undisbursed construction loans
25,232
25,367
Home equity lines of credit
19,240
20,032
Future loan commitments
15,696
27,822
Financial standby letters of credit
$ 122,394
$ 145,065
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon extending credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include commercial property, residential property, deposits, and securities. The Bank has established a reserve for credit loss of $8,000 and $8,000 as of December 31, 2020 and 2019, respectively.
Standby letters of credit are written commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded at fair value and included in the consolidated balance sheets.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 19. Regulatory and Operational Matters
In November 2018, the Bank entered into a formal written agreement (the “Agreement”) with the OCC. Pursuant to the terms of the Agreement, the Bank has appointed a Compliance Committee of three independent outside directors and one member of management responsible for monitoring adherence to the Agreement and has appointed a Lead Independent Director.
The Agreement states the Board and Bank would develop, implement and revise written documents and policies related to executive compensation, conflict of interest, internal audit, liquidity and asset/liability management, commercial loan administration, leveraged lending, practices relating to the allowance for loan and lease losses, and assumptions used in the Bank’s interest rate risk model. Under the Agreement the Bank agreed to provide a revised written 3-year strategic and capital plan for the Bank. The Bank provided the documents and policies requested in the Agreement. To date, the Bank has addressed each of the items identified in the Agreement and is currently working collaboratively with the OCC to bring all matters to full resolution. Further details pertaining to the Agreement were provided in Part II Item 9B: Other information included on the Annual Report on Form 10-K for the year ended December 31, 2018.
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 $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The Bank did not adopt the CBLR framework at December 31, 2020 but retains the option to adopt the framework in a future period.
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. Under the instituted regulatory framework, to be considered “well capitalized”, a financial institution must generally have a Total Capital ratio of at least 10%, a Tier 1 Capital ratio of at least 8.0%, a CET1 Capital ratio at least 6.5%, and a Tier 1 Leverage Capital ratio of at least 9.0%. However, regardless of a financial institution’s ratios, the OCC may require increased capital ratios or impose dividend restrictions based on the other factors it considers in assessing a bank’s capital adequacy.
Management continuously assesses the adequacy of the Bank’s capital in order to maintain its “well capitalized” status.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The Company’s and the Bank’s regulatory capital amounts and ratios at December 31, 2020 and 2019 are summarized as follows:
(In thousands)
Patriot National Bancorp, Inc.
Patriot Bank, N.A.
December 31, 2020
December 31, 2019
December 31, 2020
December 31, 2019
Amount
($)
Ratio
(%)
Amount
($)
Ratio
(%)
Amount
($)
Ratio
(%)
Amount
($)
Ratio
(%)
Total Capital (to risk weighted assets):
Actual
$ 87,428
11.132
$ 90,083
10.510
$ 97,614
12.503
$ 100,953
11.826
To be Well Capitalized(1)
-
-
-
-
78,076
10.000
85,362
10.000
For capital adequacy with Capital Buffer(2)
-
-
-
-
81,980
10.500
89,630
10.500
For capital adequacy
62,827
8.000
68,573
8.000
62,461
8.000
68,290
8.000
Tier 1 Capital (to risk weighted assets):
Actual
67,602
8.608
69,957
8.161
87,845
11.251
90,827
10.640
To be Well Capitalized(1)
-
-
-
-
62,461
8.000
68,290
8.000
For capital adequacy with Capital Buffer(2)
-
-
-
-
66,364
8.500
72,558
8.500
For capital adequacy
47,120
6.000
51,430
6.000
46,845
6.000
51,217
6.000
Common Equity Tier 1 Capital (to risk weighted assets):
Actual
59,602
7.589
61,957
7.228
87,845
11.251
90,827
10.640
To be Well Capitalized(1)
-
-
-
-
50,749
6.500
55,485
6.500
For capital adequacy with Capital Buffer(2)
-
-
-
-
54,653
7.000
59,753
7.000
For capital adequacy
35,340
4.500
38,572
4.500
35,134
4.500
38,413
4.500
Tier 1 Leverage Capital (to average assets):
Actual
67,602
7.539
69,957
7.148
87,845
9.795
90,827
9.279
To be Well Capitalized(1)
-
-
-
-
44,844
5.000
48,944
5.000
For capital adequacy
35,868
4.000
39,148
4.000
35,875
4.000
39,155
4.000
(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.
Under the final capital rules that became effective on January 1, 2015, there was a requirement for a CET1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer become subject to progressively more stringent limitations on the percentage of earnings that may be distributed to shareholders or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital conversation buffer of 2.5% has been included in the minimum capital adequacy ratios in the 2020 and 2019 column above.
The capital buffer requirement effectively raises the minimum required Total Capital ratio to 10.5%, the Tier 1 capital ratio to 8.5% and the CET1 capital ratio to 7.0% on a fully phased-in basis, which was effective on January 1, 2019. As of December 31, 2020, Patriot satisfies all regulatory capital adequacy requirements on a fully phased-in basis.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
On January 22, 2019, based on its supervisory profile, the Bank was notified by the OCC that it established individual minimum capital ratios for the Bank. Specifically, the Bank is required to maintain a Tier 1 leverage ratio of 9.0% and a total risk-based capital to risk-weighted assets of 11.0%.
At December 31, 2020, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $87.8 million, or 9.8% of adjusted total assets, which is above the well-capitalized required level of 9.0%; total risk-based capital of $97.6 million, or 12.5% of risk-weighted assets, which is above the well-capitalized required level of 11.0% of risk-weighted assets; At December 31, 2019, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of 9.3% of adjusted total assets of $90.8 million, which is above the well-capitalized required level of 9.0%; and total risk-based capital of $101.0 million, or 11.8% of risk-weighted assets, which is above the well-capitalized required level of 11.0% of risk weighted assets. Accordingly, the Bank was categorized as well capitalized as of December 31, 2020 and 2019. Management is not aware of any conditions or events since the most recent notification that would change the Bank’s category.
Note 20. Related Party Transactions
In the normal course of business, the Company grants loans to executive officers, directors and members of their immediate families, as defined, and to entities in which these individuals have more than a 10% equity ownership. The transactions are completed under the same terms applied to transaction with unrelated third parties. There was one loan granted to a related party with an outstanding balance of $100,000 as of December 31, 2019. No loan was granted or repaid during 2020. Therefore, the outstanding balance of the loan remained $100,000 as of December 31, 2020.
As of December 31, 2020 and 2019, deposits by related parties aggregated $189,000 and $469,000, respectively.
For the year ended December 31, 2019, service fees for credit analysis paid to affiliates of members of the Board of Directors aggregated $39,000.
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.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The three levels of the fair value hierarchy consist of:
Level 1
Unadjusted quoted market prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date (such as active exchange-traded equity securities and certain U.S. and government agency debt securities).
Level 2
Observable inputs other than quoted prices included in Level 1, such as:
- Quoted prices for similar assets or liabilities in active markets (such as U.S. agency and government sponsored mortgage-backed securities)
- Quoted prices for identical or similar assets or liabilities in less active markets (such as certain U.S. and government agency debt securities, and corporate and municipal debt securities that trade infrequently)
- Other inputs that are observable for substantially the full term of the asset or liability (i.e. interest rates, yield curves, prepayment speeds, default rates, etc.).
Level 3
Valuation techniques that require unobservable inputs that are supported by little or no market activity and are significant to the fair value measurement of the asset or liability (such as pricing and discounted cash flow models that typically reflect management’s estimates of the assumptions a market participant would use in pricing the asset or liability).
A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.
Cash and due from banks and accrued interest receivable and payable
The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level 1. These financial instruments are not recorded at fair value on a recurring basis.
Available-for-sale securities
The fair value of securities available-for-sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices, or using unobservable inputs employing various techniques and assumptions (Level 3).
Other Investments
The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund, which is utilized by the Bank to satisfy its Community Reinvestment Act (“CRA”) lending requirements. As this fund operates as a private fund, shares in the fund are not publicly traded but may be redeemed with 60 days’ notice at cost. For that reason, the carrying amount was considered comparable to fair value at both December 31, 2020 and 2019.
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 refined our methodology to estimate the fair value of our loan portfolio using an exit price notion. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions depending on facts and circumstances, such as origination rates, credit risk, transaction costs, liquidity, national and regional market trends and other adjustments, utilizing publicly available rates and indices. The application of an exit price notion requires the use of significant judgment.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Loans Held for Sale
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.
Derivative Asset (Liability) - Interest Rate Swaps
The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The 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.
Deposits
The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date.
The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. Patriot does not record deposits at fair value on a recurring basis.
Senior Notes, Subordinated Notes, Junior Subordinated Debt and Note Payable
Patriot does not record senior notes at fair value on a recurring basis. The fair value of the senior notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.
Patriot does not record subordinated notes issued in June 2018 at fair value on a recurring basis. The fair value of the subordinated notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.
Patriot does not record junior subordinated debt at fair value on a recurring basis. Junior subordinated debt reprices quarterly, as a result, the carrying amount is considered a reasonable estimate of fair value.
The Company considers its own credit worthiness in determining the fair value of its Senior Notes, Subordinated Notes, Notes Payable and Junior Subordinated Debt.
Federal Home Loan Bank Borrowings
The fair value of FHLB advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances. Patriot does not record FHLB advances at fair value on a recurring basis.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Contingent Consideration Liability
The Company estimates the fair value of the contingent consideration liability by using a discounted cash flow model of future contingent payments based on interest income related to the acquired PCI loans. The estimated fair value of the contingent consideration liability is reviewed on a quarterly basis and any valuation adjustments resulting from a change of estimated future contingent payments based on interest income of the acquired PCI loans affecting the contingent consideration liability will be recorded through noninterest expense. Due to the significant unobservable input related to the interest income, the contingent consideration liability is classified within Level 3 of the valuation hierarchy. An increase in the interest income may result in a higher fair value of the contingent consideration liability. Alternatively, a decrease in the interest income may result in a lower estimated fair value of the contingent consideration liability.
Off-balance-sheet financial instruments
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.
The following table provides a comparison of the carrying amounts and estimated fair values of Patriot’s financial assets and liabilities as of December 31, 2020 and 2019:
(In thousands)
December 31, 2020
December 31, 2019
Value
Hierarchy
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Financial Assets:
Cash and noninterest bearing balances due from banks
Level 1
$ 3,006
$ 3,006
$ 2,693
$ 2,693
Interest-bearing deposits due from banks
Level 1
31,630
31,630
36,711
36,711
Available-for-sale securities
Level 2
49,262
49,262
48,317
48,317
Other investments
Level 2
4,450
4,450
4,450
4,450
Federal Reserve Bank stock
Level 2
2,783
2,783
2,897
2,897
Federal Home Loan Bank stock
Level 2
4,503
4,503
4,477
4,477
Loans receivable, net
Level 3
719,596
716,822
802,049
793,559
Loans held for sale
Level 2
1,217
1,343
15,282
16,733
SBA servicing assets
Level 3
Other real estate owned Level 2
1,906
1,906
2,400
2,400
Accrued interest receivable
Level 2
6,620
6,620
3,603
3,603
Interest rate swap receivable
Level 2
1,187
1,187
Financial assets, total
$ 826,476
$ 823,887
$ 923,774
$ 916,814
Financial Liabilities:
Demand deposits
Level 2
$ 158,676
$ 158,676
$ 88,135
$ 88,135
Savings deposits
Level 2
98,635
98,635
64,020
64,020
Money market deposits
Level 2
146,389
146,389
99,115
99,115
NOW accounts
Level 2
30,529
30,529
26,864
26,864
Time deposits
Level 2
210,140
210,882
261,492
261,914
Brokered deposits
Level 1
41,287
41,643
229,909
230,073
FHLB borrowings
Level 2
90,000
97,293
100,000
103,962
Senior notes
Level 2
11,927
12,028
11,853
11,722
Subordinated debt
Level 2
9,782
10,125
9,752
9,747
Junior subordinated debt owed to unconsolidated trust
Level 2
8,110
8,110
8,102
8,102
Note payable
Level 3
1,193
1,129
Accrued interest payable
Level 2
1,971
1,971
Contingent consideration liability
Level 3
-
-
Interest rate swap liability
Level 2
1,187
1,187
Financial liabilities, total
$ 808,228
$ 817,066
$ 903,186
$ 907,534
The carrying amount of cash and noninterest bearing balances due from banks, interest-bearing deposits due from banks, and demand deposits approximates fair value, due to the short-term nature and high turnover of these balances. These amounts are included in the table above for informational purposes.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
In the normal course of its operations, Patriot assumes interest rate risk (i.e., the risk that general interest rate levels will fluctuate). As a result, the fair value of Patriot’s financial assets and liabilities are affected when interest market rates change, which change may be either favorable or unfavorable. Management attempts to mitigate interest rate risk by matching the maturities of its financial assets and liabilities. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and the maturities of its financial assets and financial liabilities, adjusting the terms of new loans and deposits in an attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk through its available funds investment strategy.
The following tables detail the financial assets measured at fair value on a recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of December 31, 2020 and 2019.
(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, 2020:
U. S. Government agency mortgage-backed securities
$ -
$ 16,833
$ -
$ 16,833
Corporate bonds
-
17,290
-
17,290
Subordinated notes
-
9,005
-
9,005
SBA loan pools
-
5,567
-
5,567
Municipal bonds
-
-
Available-for-sale securities
$ -
$ 49,262
$ -
$ 49,262
Interest rate swap receivable
$ -
$ 1,187
$ -
$ 1,187
Interest rate swap liability
$ -
$ 1,187
$ -
$ 1,187
December 31, 2019:
U. S. Government agency mortgage-backed securities
$ -
$ 16,685
$ -
$ 16,685
Corporate bonds
-
17,313
-
17,313
Subordinated notes
-
9,204
-
9,204
SBA loan pools
-
5,115
-
5,115
Available-for-sale securities
$ -
$ 48,317
$ -
$ 48,317
Impaired PCI Loans, net
$ -
$ -
$
$
Contingent consideration liability
$ -
$ -
$
$
Interest rate swap receivable
$ -
$
$ -
$
Interest rate swap liability
$ -
$
$ -
$
Patriot measures certain financial assets and financial liabilities at fair value on a non-recurring basis. When circumstances dictate (e.g., impairment of long-lived assets, other than temporary impairment of collateral value), the carrying values of such financial assets and financial liabilities are adjusted to fair value or fair value less costs to sell, as may be appropriate.
During the year ended December 31, 2020 and 2019, the Company had no transfers into or out of Levels 1, 2 or 3.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The table below presents the valuation methodology and unobservable inputs for level 3 assets measured at fair value on a non-recurring basis as of December 31, 2020 and 2019:
(In thousands)
Fair Value
Valuation
Methodology
Unobservable Inputs
Range of Inputs
December 31, 2020:
Impaired loans, net
$ 22,971
Real Estate Appraisals
Discount for appraisal type
5.8% - 20%
Other Real Estate Owned
1,906
Real Estate Appraisals
Discount for appraisal type
5.84%
SBA servicing assets
Discounted Cash Flows
Market discount rates
14.73% - 14.90%
December 31, 2019:
Impaired loans, net
$ 18,132
Real Estate Appraisals
Discount for appraisal type
8% - 20%
Other Real Estate Owned
2,400
Real Estate Appraisals
Discount for appraisal type
12%
SBA servicing assets
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 sheets, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not necessarily represent the complete underlying value of financial instruments included in the consolidated financial statements.
The estimated fair value amounts have been measured as of December 31, 2020 and 2019 and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of the financial instruments measured may be different than if they had been subsequently valued.
The information presented should not be interpreted as an estimate of the total fair value of Patriot’s assets and liabilities, since only a portion of Patriot’s assets and liabilities are required to be measured at fair value for financial reporting purposes. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between Patriot’s fair value disclosures and those of other bank holding companies may not be meaningful.
PATRIOT NATIONAL BANCORP, INC. 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, 2020 and 2019
(In thousands)
As of December 31,
ASSETS
Cash and due from banks
$
$
Investment in subsidiary
91,836
96,235
Other assets
1,104
Total assets
93,488
97,466
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings
29,819
29,707
Accrued expenses and other liabilities
Shareholders' equity
63,219
66,994
Total liabilities and shareholders' equity
$ 93,488
$ 97,466
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Year ended December 31,
Expenses:
Interest on subordinated debt
$
$
$
Interest on senior debt
1,569
1,571
1,242
Total interest expense
1,916
2,047
1,696
Other expenses
Loss before benefit for income taxes
2,075
2,261
2,009
Benefit for income taxes
(532 )
(504 )
-
Loss before equity in undistributed net income of subsidiary
1,543
1,757
2,009
Equity in undistributed net income of subsidiary
(2,276 )
(1,060 )
5,205
Net (loss) income
(3,819 )
(2,817 )
3,196
Equity in subsidiary other comprehensive income, net of subsidiary
(115 )
(671 )
Total comprehensive (loss) income
$ (3,934 )
$ (2,394 )
$ 2,525
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Year ended December 31,
Cash Flows from Operating Activities:
Net (loss) income
$ (3,819 )
$ (2,817 )
$ 3,196
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed income of subsidiary
2,276
1,060
(5,205 )
Dividends received from Patriot Bank, N.A.
2,000
-
-
Share-based compensation expense
Amortization of debt issuance costs
Change in assets and liabilities:
Increase in other assets
(540 )
(505 )
-
(Decrease) increase in accrued expenses and other liabilities
(315 )
Net cash used in operating activities
(127 )
(1,621 )
(1,631 )
Cash Flows from Investing Activities:
Net decrease (increase) in investment in Patriot Bank N.A.
-
(7,800 )
Net cash provided by (used in) investing activities
-
(7,800 )
Cash Flows from Financing Activities:
Proceeds from issuance of senior notes, net of expenses
-
-
9,709
Dividends paid on common stock
-
(155 )
(154 )
Net cash (used in) provided by financing activities
-
(155 )
9,555
Net (decrease) increase in cash and cash equivalents
(119 )
(1,776 )
Cash and cash equivalents at beginning of year
2,443
2,319
Cash and cash equivalents at end of year
$
$
$ 2,443
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest
$ 1,776
$ 1,593
$ 1,600
Cash paid for income taxes
$ -
$ -
$ -
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 23. Subsequent Event
The Company evaluated its December 31, 2020 consolidated financial statements for subsequent events through the date the consolidated financial statements were issued. As noted in Note 4, the Bank had modified loans to defer the payment of interest and/or principal for up to 180 days pursuant to the CARES Act. The majority of the modifications granted to customers expired as of March 30, 2021, the balance of loans modified in conjunction with the CARES Act had declined to $37.7 million.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
Patriot maintains disclosure controls and procedures that are designed to provide reasonable assurance that information that is required to be disclosed is accumulated and communicated to management in a timely fashion. In designing and evaluating such controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management’s judgment is required in evaluating controls and procedures.
As used herein, “disclosure controls and procedures” means controls and other procedures of Patriot that are designed to ensure that information required to be disclosed by Patriot in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC rules and regulations. Patriot’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Continual evaluation of the effectiveness of its disclosure controls and procedures is performed by management, with the participation of Patriot’s Chief Executive Officer and Chief Financial Officer. Management has concluded that Patriot’s disclosure controls and procedures were effective as of and for the year ended December 31, 2020.
A system of internal controls is designed to provide reasonable assurance that management’s operating objectives, reliance on financial information and reports, and compliance with its mandated and stakeholder obligations are achieved. In implementing internal controls, management must consider constraints on resources and the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management believes all necessary disclosure controls and procedures needed to provide reasonable assurance that information will be communicated in a timely fashion to management are in place.
Management’s Annual Report on Internal Control Over Financial Reporting
Patriot’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in rules 13a-15(f) and 15d-15f under the Exchange Act. Patriot’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
Patriot’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and deployment of its assets; provide reasonable assurance that transactions are recorded in a timely manner to enable the preparation of financial statements in accordance with U.S. GAAP; receipts and disbursements are made only in compliance with the authorizations established by management and policies instituted by its Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s assessment, management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. In addition, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and/or procedures may deteriorate.
In accordance with the rules and regulations of the SEC, management’s report on the design and effectiveness of Patriot’s system of internal controls over financial reporting is not subject to attestation by Patriot’s independent registered public accounting firm. The SEC rules and regulations applicable to Patriot only require a report by management. Accordingly, this annual report on Form 10-K for the year ended December 31, 2020 does not include an opinion by Patriot’s independent registered public accounting firm regarding management’s system of internal controls over financial reporting.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting during the fourth fiscal quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. Other Information
None
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by Items 401, 405, 406 and 407 (c)(3); (d)(4) and (d)(5) of Regulation S-K is incorporated into this Form 10-K by reference to the Company’s definitive proxy statement or information statement for its 2020 Annual Meeting of Shareholders to be filed within 120 days following December 31, 2020.
The Company has previously adopted a Code of Conduct for its senior financial officers, which was filed as Exhibit 14 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004, filed with the SEC on March 25, 2015. In addition, the Company adopted a Code of Ethics and Conflict of Interest Policy on October 24, 2018, amended as of March 27, 2019, which was filed as Exhibit 14.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019. In March 2021, the Code of Ethics and Conflict of Interest Policy was further amended, which was filed herewith as Exhibit 14.3. Copies of these codes will be provided to any person so requesting by writing to Patriot National Bancorp Inc., 900 Bedford Street, Stamford, Connecticut 06901, Attn: Joseph D. Perillo, Chief Financial Officer.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. Executive Compensation
The information required by Item 402 of Regulation S-K is incorporated into this Form 10-K by reference to the Definitive Proxy Statement or Information Statement to be filed within 120 days following December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by Item 201(d) and Item 403 of Regulation S-K is incorporated into this Form 10-K by reference to the Definitive Proxy Statement or Information Statement, to be filed within 120 days following December 31, 2020.
The table below provides information as of December 31, 2020, with respect to the compensation plan under which equity securities of the Company are authorized for issuance to directors, officers or employees.
Plan Category
Number of common shares
to be issued upon vesting
of restricted shares
Weighted average
grant date fair value
Number of common shares
available for issuance
under the Plan
excluding unvested shares
Equity compensation plans approved by security holders
18,498
$ 7.29
2,850,507
Equity compensation plans not approved by security holders
-
-
-
Total
18,498
$ 7.29
2,850,507

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Items 404 and 407(a) of Regulation S-K is incorporated into this Form 10-K by reference to the Definitive Proxy Statement or Information Statement to be filed within 120 days following December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. Principal Accountant Fees and Services
The information required by Item 9(e) of Schedule 14A is incorporated into this Form 10-K by reference to the Definitive Proxy Statement or Information Statement to be filed within 120 days following December 31, 2020.
Part IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. Exhibits and Financial Statement Schedules
Exhibits
No.
Description
3(i)
Certificate of Incorporation of Patriot National Bancorp, Inc. (incorporated by reference to Exhibit 3(i) to the Company’s Current Report on Form 8-K filed on December 1, 1999)
3(i)(A)
Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. dated July 16, 2004 (incorporated by reference to Exhibit 3(i)(A) to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004 filed on March 25, 2005)
3(i)(B)
Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. dated June 15, 2006 (incorporated by reference to Exhibit 3(i)(B) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on November 14, 2006)
3(i)(C)
Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp Inc., dated October 6, 2010 (incorporated by reference to Exhibit 3.l to the Company’s Current Report Form 8-K filed on October 21, 2010)
3(ii)
Amended and Restated By-laws of Patriot National Bancorp Inc. (incorporated by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed on November 1, 2010)
Form of 6.25% Fixed to Floating Rate Subordinated Note (incorporated by reference to Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 filed on August 14, 2018)
10(a)(1)
2012 Stock Plan of Patriot National Bancorp Inc. (incorporated by reference from Annex A to the Proxy Statement on Form 14C filed on November 1, 2011)
10(a)(2)
Amended Financial Services Agreement, by and between Patriot National Bancorp, Inc. and PNBK Sponsor LLC, dated August 7, 2014 (incorporated by reference to Exhibit 10(a) (20) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (Commission File No. 000-29599) filed on August 8, 2014)
10(a)(3)
Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10(6) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 filed on August 14, 2018)
10(a)(4)
Form of Agreement with The Comptroller of the Currency, dated as of November 7, 2018 (incorporated by reference to Exhibit 99(1) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 filed on November 14, 2018)
14.1
Code of Conduct for Senior Financial Officers (incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10 -KSB for the year ended December 31, 2004 (Commission File No. 000-29599)
14.2
Code of Ethics and Conflict of Interest Policy, dated March 27, 2019 (incorporated by reference to Exhibit 14.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed on April 1, 2019)
14.3
Code of Ethics and Conflict of Interest Policy, dated March 24, 2021 (filed herewith)
Subsidiaries of Bancorp (incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on April 29, 2020)
23.1
Consent of RSM US LLP
31(1)
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31(2)
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certifications
101.INS#
XBRL Instance Document
101.SCH#
XBRL Schema Document
101.CAL#
XBRL Calculation Linkbase Document
101.LAB#
XBRL Labels Linkbase Document
101.PRE#
XBRL Presentation Linkbase Document
101.DEF# XBRL Presentation Linkbase Document
The exhibits marked with the section symbol (#) are interactive data files.