UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

 

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to            

 

Commission file number 000-29599

 

PATRIOT NATIONAL BANCORP, INC.

 

(Exact name of registrant as specified in its charter)

 

Connecticut	06-1559137
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
900 Bedford Street, Stamford, Connecticut	06901
(Address of principal executive offices)	(Zip Code)

(203) 252-5900

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒    No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐    No ☒

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS: 

 

Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes   ☐    No   ☐ 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		PNBK		NASDAQ Global Market

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of May 14, 2021, there were 3,946,576 shares of the registrant’s common stock outstanding.

 

 

 

 

		March 31,				December 31,
(In thousands, except share data)		2021				2020
Assets
Cash and due from banks:
Noninterest bearing deposits and cash		$	2,593			$	3,006
Interest bearing deposits			81,681				31,630
Total cash and cash equivalents			84,274				34,636
Investment securities:
Available-for-sale securities, at fair value			57,893				49,262
Other investments, at cost			4,450				4,450
Total investment securities			62,343				53,712
Federal Reserve Bank stock, at cost			2,744				2,783
Federal Home Loan Bank stock, at cost			4,503				4,503
Loans receivable (net of allowance for loan losses: 2021: $10,426 and 2020: $10,584)			666,250				719,596
Loans held for sale			2,829				1,217
Accrued interest and dividends receivable			6,270				6,620
Premises and equipment, net			33,128				33,423
Other real estate owned			1,216				1,906
Deferred tax asset, net			11,274				11,496
Goodwill			1,107				1,107
Core deposit intangible, net			331				343
Other assets			9,919				9,387
Total assets		$	886,188			$	880,729
Liabilities
Deposits:
Noninterest bearing deposits		$	173,520			$	158,676
Interest bearing deposits			519,358				526,980
Total deposits			692,878				685,656
Federal Home Loan Bank and correspondent bank borrowings			90,000				90,000
Senior notes, net			11,946				11,927
Subordinated debt, net			9,789				9,782
Junior subordinated debt owed to unconsolidated trust, net			8,112				8,110
Note payable			943				994
Advances from borrowers for taxes and insurance			2,158				3,786
Accrued expenses and other liabilities			6,425				7,255
Total liabilities			822,251				817,510
Commitments and Contingencies
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding			-				-
Common stock, $.01 par value, 100,000,000 shares authorized; As of March 31, 2021: 4,018,013 shares issued; 3,944,272 shares outstanding; As of December 31, 2020: 4,017,313 shares issued; 3,943,572 shares outstanding;			106,363				106,329
Accumulated deficit			(41,738	)			(42,592	)
Accumulated other comprehensive loss			(688	)			(518	)
Total shareholders' equity			63,937				63,219
Total liabilities and shareholders' equity		$	886,188			$	880,729

 

		Three Months Ended March 31,
(In thousands, except per share amounts)		2021				2020
Interest and Dividend Income
Interest and fees on loans		$	7,743			$	10,033
Interest on investment securities			310				416
Dividends on investment securities			34				138
Other interest income			24				135
Total interest and dividend income			8,111				10,722
Interest Expense
Interest on deposits			785				3,200
Interest on Federal Home Loan Bank borrowings			733				697
Interest on senior debt			229				229
Interest on subordinated debt			234				268
Interest on note payable and other			4				5
Total interest expense			1,985				4,399
Net interest income			6,126				6,323
Provision for Loan Losses			-				804
Net interest income after provision for loan losses			6,126				5,519
Non-interest Income
Loan application, inspection and processing fees			63				53
Deposit fees and service charges			65				114
Gains on sales of loans			94				12
Rental income			130				131
Other income			90				111
Total non-interest income			442				421
Non-interest Expense
Salaries and benefits			2,216				3,861
Occupancy and equipment expense			920				949
Data processing expense			350				390
Professional and other outside services			852				784
Project expenses, net			10				94
Advertising and promotional expense			62				147
Loan administration and processing expense			24				24
Regulatory assessments			228				440
Insurance expense, net			60				70
Communications, stationary and supplies			145				120
Other operating expense			528				492
Total non-interest expense			5,395				7,371
Income (loss) before income taxes			1,173				(1,431	)
Provision (benefit) for income taxes			319				(359	)
Net income (loss)		$	854			$	(1,072	)
Basic earnings (loss) per share		$	0.22			$	(0.27	)
Diluted earnings (loss) per share		$	0.22			$	(0.27	)

 

(In thousands)		Three Months Ended March 31,
		2021				2020
Net income (loss)		$	854			$	(1,072	)
Other comprehensive loss
Unrealized holding loss on securities			(229	)			(1,808	)
Income tax effect			59				466
Total other comprehensive loss			(170	)			(1,342	)
Comprehensive income (loss)		$	684			$	(2,414	)

 

		Three Months Ended March 31, 2021
(In thousands, except shares)		Number of Shares				Common Stock				Accumulated Deficit				Accumulated Other Comprehensive (Loss) Income				Total
Balance at December 31, 2020			3,943,572			$	106,329			$	(42,592	)		$	(518	)		$	63,219
Comprehensive income:
Net income			-				-				854				-				854
Unrealized holding loss on available-for-sale securities, net of tax			-				-				-				(170	)			(170	)
Total comprehensive income			-				-				854				(170	)			684
Share-based compensation expense			-				34				-				-				34
Vesting of restricted stock			700				-				-				-				-
Balance at March 31, 2021			3,944,272			$	106,363			$	(41,738	)		$	(688	)		$	63,937

		Three Month Ended March 31, 2020
(In thousands, except shares)		Number of Shares				Common Stock				Accumulated Deficit				Accumulated Other Comprehensive (Loss) Income				Total
Balance at December 31, 2019			3,930,669			$	106,170			$	(38,773	)		$	(403	)		$	66,994
Comprehensive (loss) income:
Net loss			-				-				(1,072	)			-				(1,072	)
Unrealized holding loss on available-for-sale securities, net of tax			-				-				-				(1,342	)			(1,342	)
Total comprehensive loss			-				-				(1,072	)			(1,342	)			(2,414	)
Share-based compensation expense			-				43				-				-				43
Vesting of restricted stock			2,172				-				-				-				-
Balance at March 31, 2020			3,932,841			$	106,213			$	(39,845	)		$	(1,745	)		$	64,623

 

(In thousands)		Three Months Ended March 31,
		2021				2020
Cash Flows from Operating Activities:
Net income (loss)		$	854			$	(1,072	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization and accretion of investment premiums and discounts, net			89				44
Amortization and accretion of purchase loan premiums and discounts			285				190
Amortization of debt issuance costs			28				28
Amortization of core deposit intangible			12				18
Amortization of servicing assets of sold SBA loans			6				5
Provision for loan losses			-				804
Depreciation and amortization			384				392
Share-based compensation			34				43
Decrease (increase) in deferred income taxes			281				(390	)
Originations of SBA loans held for sale			(2,805	)			(2,566	)
Proceeds from sale of SBA loans held for sale			1,006				144
Gains on sale of SBA loans held for sale, net			(94	)			(12	)
Net gain on sale of other real estate owned			(2	)			-
Changes in assets and liabilities:
(Increase) decrease in accrued interest and dividends receivable			350				(198	)
Increase in other assets			(1,025	)			(564	)
Decrease in accrued expenses and other liabilities			(237	)			(1,179	)
Net cash used in operating activities			(834	)			(4,313	)
Cash Flows from Investing Activities:
Proceeds from maturity or sales on available-for-sale securities			1,886				-
Principal repayments on available-for-sale securities			3,066				1,635
Purchases of available-for-sale securities			(13,901	)			-
Redemption of Federal Reserve Bank stock			39				-
Decrease in originated loans receivable, net			69,366				11,873
Purchases of loans receivable			(16,041	)			(19,025	)
Purchases of premises and equipment			(178	)			(3	)
Proceeds from sale of other real estate owned			692				-
Net cash provided by (used in) investing activities			44,929				(5,520	)
Cash Flows from Financing Activities:
Increase in deposits, net			7,222				33,679
Repayments of FHLB borrowings			-				(10,000	)
Principal repayments of note payable			(51	)			(50	)
Decrease in advances from borrowers for taxes and insurance			(1,628	)			(1,044	)
Net cash provided by financing activities			5,543				22,585
Net increase in cash and cash equivalents			49,638				12,752
Cash and cash equivalents at beginning of period			34,636				39,404
Cash and cash equivalents at end of period		$	84,274			$	52,156

(In thousands)		Three Months Ended March 31,
		2021				2020
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest		$	1,836			$	4,781
Cash paid for income taxes, net		$	47			$	3
Non-cash transactions:
(Decrease) increase in premises and equipment		$	(130	)		$	133
Reclass of premises and equipment to implementation cost		$	52			$	-
Decrease (increase) in accrued expense and other liabilities		$	78			$	(133	)
Transfers of SBA loans held for sale to loans receivable		$	281			$	280
Operating lease right-of-use assets		$	-			$	(57	)
Operating lease liabilities		$	-			$	57
Capitalized servicing assets		$	17			$	2
Increase in interest rate swaps assets		$	396			$	601
Increase in interest rate swaps liabilities		$	(396	)		$	(601	)

 

Note 1.

Basis of Financial Statement Presentation

 

The accompanying unaudited interim condensed consolidated financial statements of Patriot National Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries Patriot Bank, N.A. (the “Bank”), Patriot National Statutory Trust I and PinPat Acquisition Corporation (collectively, “Patriot”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included on the Annual Report on Form 10-K for the year ended December 31, 2020.

 

The consolidated balance sheet at December 31, 2020 presented herein has been derived from the audited consolidated financial statements of the Company at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statements.

 

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 the Company’s more significant accounting policies and estimates, in that they are critical to the presentation of the Company’s consolidated 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 the Company’s consolidated financial statements.

 

Reclassifications:

 

Certain amounts appearing in the financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders’ equity as previously reported.

 

The information furnished reflects, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results of operations that may be expected for the remainder of 2021.

 

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.

 

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, additional valuation allowance associated with our net deferred tax assets, 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 (Unaudited)

 

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.

 

The Federal Reserve System (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 adopted another $1.9 trillion stimulus package in March 2021. 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.

 

Note 2.

Accounting Policies

 

Please refer to the summary of Significant Accounting Policies included in the Company’s 2020 Annual Report on Form 10-K for a list of all policies in effect as of December 31, 2020. The below summary is intended to provide updates or new policies required as a result of a new accounting standard or a change to the Company’s operations or assets that require a new or amended policy.

 

Employee Retention Credit

 

The CARES Act also provided for an employee retention credit (“Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 70% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee throughout the year. The Company adopted a policy to recognize the employee retention credit when earned and to recognize the credit as a reduction to compensation and benefits expense on the Company’s consolidated statements of operations. Accordingly, the Company recorded an employee retention credit of $843,000 in the first quarter of 2021. The Company is currently in the process of filing for this credit.

 

Recently Adopted and Issued Accounting Standards

 

Accounting Standards Adopted During 2021

 

Effective January 1, 2021, the following new Accounting Standards Updates (ASU) were adopted by the Company:

 

ASU 2019-12

 

ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The ASU is effective for the Company on January 1, 2021. The adoption of ASU 2019-12 did not have any impact on our consolidated financial statements.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

Accounting Standards Issued But Not Yet Adopted

 

ASU 2016-13

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU changes the methodology for measuring credit losses on financial instruments measured at amortized cost to a current expected loss (“CECL”) model. Under the CECL model, entities will estimate credit losses over the entire contractual term of a financial instrument from the date of initial recognition of the instrument. The ASU also changes the existing impairment model for available-for-sale debt securities. In cases where there is neither the intent nor a more-likely-than-not requirement to sell the debt security, an entity will record credit losses as an allowance rather than a direct write-down of the amortized cost basis. Additionally, ASU 2016-13 notes that credit losses related to available-for-sale debt securities and purchased credit impaired loans should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018. In November 2019, the FASB issued ASU 2019-10, which amends the effective date of ASC 326 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities, and delays the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a small reporting company, the delay will be applicable to the Company. Management is currently evaluating the impact that the standard will have on its consolidated financial statements.

 

ASU Update 2020-02

 

In January 2020, the FASB issued ASU No. 2020-02, “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. See the discussion regarding the adoption of ASU 2016-13 above.

 

ASU Update 2020-03

 

In March 2020, the FASB issued ASU No. 2020-3, “Codification Improvements to Financial Instruments.” This ASU clarifies various financial instruments topics, including the CECL standard issued in 2016. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Other amendments are effective upon issuance of this ASU. See the discussion regarding the adoption of ASU 2016-13 above.

 

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.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

Note 3.

Available-for-Sale Securities

 

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of available-for-sale securities at March 31, 2021 and December 31, 2020 are as follows:

 

 

The following table presents the 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 March 31, 2021 and December 31, 2020:

 

 

At March 31, 2021 and December 31, 2020, 26 of 41 and 22 of 37 available-for-sale securities had unrealized losses with an aggregate decline of 3.6% and 4.0% from the amortized cost of those securities, respectively.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

Based on its quarterly reviews, management believes that none of the losses on available-for-sale securities noted above constitute other-than-temporary impairment (“OTTI”). The noted losses are considered temporary due to market fluctuations in available interest rates on U.S. Government agency debt, mortgage-backed securities issued by U.S. Government agencies, subordinated notes, corporate debt, and municipal bonds. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected. SBA government guaranteed loan pools securities were purchased at a premium and the impairment was attributable primarily to increased prepayment speeds. The timely payment of principal and interest on these securities is guaranteed by the U.S. Government agency. The contractual terms of the subordinated notes do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Since Patriot is not more-likely-than-not to be required to sell the investments before recovery of the amortized cost basis and does not intend to sell the securities at a loss, none of the available-for-sale securities noted are considered to be OTTI as of March 31, 2021.

 

As of March 31, 2021 and December 31, 2020, available-for-sale securities of $5.6 million and $6.1 million were pledged primarily to secure municipal deposits, respectively. The securities were pledged to the Federal Reserve Bank (“FRB”).

 

The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held as of March 31, 2021 and December 31, 2020. The mortgages underlying the mortgage-backed securities are not due at a single maturity date. Additionally, these mortgages often are and generally may be pre-paid without penalty, creating a degree of uncertainty that such investments can be held until maturity. For convenience, mortgage-backed securities have been included in the summary as a separate line item.

 

 

During the three months ended March 31, 2021, the Bank purchased $10.9 million U.S. Government agency mortgage-backed securities and $3.0 million SBA government guaranteed loan pools securities. During the three months ended March 31, 2020, the Bank did not purchase any available-for-sale securities. There was no sale of available-for-sale securities in the three months ended March 31, 2021 and 2020.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

Note 4.

Loans Receivable and Allowance for Loan and Lease Losses

 

As of March 31, 2021 and December 31, 2020, loans receivable, net, consisted of the following:

 

 

Patriot's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York, and the five Boroughs of New York City. Patriot originates commercial real estate loans, commercial business loans, a variety of consumer loans, and construction loans, and has purchased residential loans since 2016. All commercial and residential real estate loans are collateralized primarily by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent to some degree on the status of the regional economy as well as upon the regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions.

 

Patriot has established credit policies applicable to each type of lending activity in which it engages and evaluates the creditworthiness of each borrower. Unless extenuating circumstances exist, Patriot limits the extension of credit on commercial real estate loans to 75% of the market value of the underlying collateral. Patriot’s loan origination policy for multi-family residential real estate is limited to 80% of the market value of the underlying collateral. In the case of construction loans, the maximum loan-to-value is 75% of the “as completed” appraised value of the real estate project. Management monitors the appraised value of collateral on an on-going basis and additional collateral is requested when warranted. Real estate is the primary form of collateral, although other forms of collateral do exist and may include such assets as accounts receivable, inventory, marketable securities, time deposits, and other business assets.

 

Risk characteristics of the Company’s portfolio classes include the following:

 

Commercial Real Estate Loans

 

In underwriting commercial real estate loans, Patriot evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loans. Repayment of such loans may be negatively impacted should the borrower default, the value of the property collateralizing the loan substantially decline, or there are declines in general economic conditions. Where the owner occupies the property, Patriot also evaluates the business’ ability to repay the loan on a timely basis and may require personal guarantees, lease assignments, and/or the guarantee of the operating company.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

Residential Real Estate Loans

 

In 2013, Patriot discontinued offering primary mortgages on personal residences. Repayment of residential real estate loans may be negatively impacted should the borrower have financial difficulties, should there be a significant decline in the value of the property securing the loan, or should there be declines in general economic conditions.

 

During the three months ended March 31, 2021 and 2020, Patriot purchased $16.0 million and $4.1 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 portfolio, which totaled $44.8 million and $55.0 million at March 31, 2021 and December 31, 2020, respectively, 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.

 

In the first quarter of 2021, Patriot did not purchase any education loans. Education loans of $14.9 million were purchased during the three months ended March 31, 2020.

 

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.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

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% 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 $22.1 million and $21.6 million as of March 31, 2021 and December 31, 2020, respectively. During the three-month period ended March 31, 2021, $281,000 SBA loans previously classified as held for sale were transferred to held for investment.

 

Small Business Administration Paycheck Protection Program

 

The CARES Act created the SBA’s Paycheck Protection Program. Under the Paycheck Protection Program, $669 billion was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions that process loan applications and service the loans. The Bank started participating in the SBA’s Paycheck Protection Program in January 2021.

 

Paycheck Protection Program loans are included in the commercial real estate loans and commercial and industrial loan classifications, and totaled $2.7 million as of March 31, 2021.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

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 the three months ended March 31, 2021 and 2020:

 

 

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

 

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

The following tables summarize, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for impairment as of December 31, 2020:

 

 

Patriot monitors the credit quality of its loans receivable on an ongoing basis. Credit quality is monitored by reviewing certain indicators, including cash flow from business operations, loan to value ratios, debt service coverage ratios, and credit scores.

 

Patriot employs a risk rating system as part of the risk assessment of its loan portfolio. At origination, 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 semi-annual analysis of the results of its risk rating process. The 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.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

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.

 

Allowance for loan losses methodology

 

In 2021, the Company refined its methodology in determining the qualitative factors within the allowance for loan losses. Qualitative adjustments are aggregated into nine categories described in the Interagency Policy Statement (“Interagency Statement”) issued by the bank regulators. Within the statement, the following qualitative factors are considered:

 

● Changes in lending policies and procedures, including underwriting standards, collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

● Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments;

● Changes in the nature and volume of the loan portfolio and terms of loans;

● Changes in the experience, ability and depth of lending management and staff;

● Changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans;

● Changes in the quality of the loan review system;

● Changes in the value of the underlying collateral for collateral-dependent loans;

● The existence and effect of any concentrations of credit and changes in the level of such concentrations;

● The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our current loan portfolio;

 

The additional risk factor for special mention loans and substandard loans and the risk factor related to COVID-19 pandemic, were eliminated. The separate adjustment for Special Mention and Substandard loans within each pool is now incorporated into the factor for “Changes in the volume and loss severity of past due loans, the volume of non-accrual, and the volume and loss severity of adversely classified or graded loans”, which now includes adjustments for the percentage of Special Mention and Substandard loans in each portfolio segment. The COVID-19 factor was eliminated since, after more than a year into the pandemic, we consider that the impact on both the economy and our portfolio is now manifest in economic data (GDP, unemployment, retail sales, manufacturing output, etc.) and in our portfolio, as reflected by the volume of Special Mention and Substandard loans that have resulted from deterioration in borrower performance as a direct result of the pandemic.

 

The refining in methodology resulted in better alignment of the credit characteristics of the various risk grades and loan types with the calculated allowance, and did not have any impact on the provision in the first quarter of 2021.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

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 March 31, 2021.

 

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

The following tables summarize performing and non-performing loans (i.e., non-accruing) receivable by portfolio segment, by aging category, by delinquency status as of December 31, 2020.

 

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

The following tables summarize non-performing (i.e., non-accruing) loans by aging category and status, within the applicable loan portfolio segment as of March 31, 2021 and December 31, 2020:

 

 

If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $255,000 and $191,000 would have been recognized during the three months ended March 31, 2021 and 2020, respectively.

 

Interest income collected and recognized on non-accruing loans for the three months ended March 31, 2021 and 2020 was $48,000 and $28,000, respectively.

 

The accrual of interest on loans is discontinued at the time the loan is 90 days past due for payment unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged-off, at an earlier date, if collection of principal or interest is considered doubtful.

 

All interest accrued, but not collected for loans that are placed on non-accrual status or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, future payments are reasonably assured, after at least six months of timely payment history. 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 loans under $100,000 and consumer installment loans to be pools of smaller homogeneous loan balances, and therefore are collectively evaluated for impairment, and not individually measured for impairment.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

Troubled Debt Restructurings (“TDR”)

 

On a case-by-case basis, Patriot may agree to modify the contractual terms of a borrower’s loan to assist customers who may be experiencing financial difficulty. If the borrower is experiencing financial difficulties and a concession has been made, the loan is classified as a TDR.

 

Substantially all TDR loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below market rate, an extension of the term of the loan, or a combination of adjusting these two contractual attributes. TDR loan modifications may also result in the forgiveness of principal or accrued interest. In addition, when modifying commercial loans, Patriot frequently obtains additional collateral or guarantor support. If the borrower has performed under the existing contractual terms of the loan and Patriot’s underwriters determine that the borrower has the capacity to continue to perform under the terms of the TDR, the loan continues accruing interest. Non-accruing TDRs may be returned to accrual status when there has been a sustained period of performance (generally six consecutive months of payments) and both principal and interest are reasonably assured of collection.

 

The following table summarizes the recorded investment in TDRs as of March 31, 2021 and December 31, 2020:

 

 

During the three months ended March 31, 2021 and 2020, no loans were modified as TDR.

 

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 the interest-only payment period, or substituting or adding a co-borrower or guarantor. There were no defaults of TDRs during the three months ended March 31, 2021 and 2020. At March 31, 2021 and December 31, 2020, there were no commitments to advance additional funds under TDRs.

 

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

 

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2021 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, 2021. In addition, on April 7, 2020, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs. The Bank had modified $232.7 million of loans to borrowers to defer the payment of interest and/or principal for up to 180 days, and approximately $37.7 million of loans remained on deferment as of March 31, 2021. According to regulatory guidance and CARES Act, these modified loans were not TDRs as of March 31, 2021.

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

Impaired Loans

 

The following table reflects information about the impaired loans by class as of March 31, 2021 and December 31, 2020:

 

 

The following tables summarize additional information regarding impaired loans by class for the three months ended March 31, 2021 and 2020.

 

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

 

Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs. Based on the ongoing monitoring and analysis of the loan portfolio, thirty-three loans were identified as impaired, with a total recorded balance of $29.0 million as of March 31, 2021, for which $1.9 million specific reserves were established. Twenty-three out of thirty-three impaired loans were individually evaluated for impairment, and the remaining ten impaired loans with balances under $100,000, were collectively evaluated, and not individually evaluated for impairment.

 

At December 31, 2020, exposure to the impaired loans was related to twenty-six borrowers. Total recorded balance was $24.4 million, for which $1.4 million special reserves were established. All impaired loans were evaluated individually.

 

For collateral dependent loans, appraisal reports of the underlying collateral, have been obtained from independent licensed appraisal firms. For non-performing loans, the independently determined appraised values were first reduced by a 5.8% discount to reflect the Bank’s experience selling Other Real Estate Owned (OREO) properties, and were further reduced by 8% in selling costs, in order to estimate the potential loss, if any, that may eventually be realized. Performing loans are monitored to determine when, if at all, additional loan loss reserves may be required for a loss of underlying collateral value. For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate.

 

Loans not requiring specific reserves had fair values exceeding the total recorded investment, supporting the net investment in the loan which includes principal balance, unamortized fees and costs and accrued interest, if any. Once a borrower is in default, Patriot is under no obligation to advance additional funds on unused commitments.