PATRIOT NATIONAL BANCORP INC : Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

“SAFE HARBOR” STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995




This Quarterly Report on Form 10-Q contains statements that relate to future
events and expectations and, as such, constitute forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995.
Certain statements, other than purely historical information, including
estimates, projections, statements relating to our strategies, outlook, business
and financial prospects, business plans, objectives, and expected operating
results, and the assumptions upon which those statements are based, are
"forward-looking statements." These forward-looking statements generally are
identified by the words "believes," "project," "expects," "anticipates,"
"estimates," "intends," "strategy," "plan," "may," "will," "would," "will be,"
"will continue," "will likely result," and similar expressions. Forward-looking
statements are based on current expectations and assumptions that are subject to
risks and uncertainties which may cause actual results to differ materially from
the forward-looking statements. Forward-looking statements are not guarantees of
future performance. Although Patriot believes that the expectations reflected in
any forward-looking statements are based on reasonable assumptions, these
expectations may not be attained and it is possible that actual results may
differ materially from those indicated by these forward-looking statements due
to a variety of risks, uncertainties and changes in circumstances, many of which
are beyond Patriot's control.



Many possible events or factors could affect Patriot's future financial results
and performance and could cause the actual results, performance or achievements
of Patriot to differ materially from any anticipated results expressed or
implied by such forward-looking statements. Such risks and uncertainties
include, among others:

(1) changes in prevailing interest rates which would affect the interest earned
on the Company's interest earning assets and the interest paid on its interest
bearing liabilities;

(2) the timing of re-pricing of the Company’s interest earning assets and
interest bearing liabilities;

(3) the effect of changes in governmental monetary policy;

(4) the effect of changes in regulations applicable to the Company and the Bank
and the conduct of its business;

(5) changes in competition among financial service companies, including possible
further encroachment of non-banks on services traditionally provided by banks;

(6) the ability of competitors that are larger than the Company to provide
products and services which it is impracticable for the Company to provide;

(7) the state of the economy and real estate values in the Company’s market
areas, and the consequent effect on the quality of the Company’s loans;

(8) demand for loans and deposits in our market area;


(9) recent governmental initiatives that are expected to have a profound effect
on the financial services industry and could dramatically change the competitive
environment of the Company;

(10) other legislative or regulatory changes, including those related to
residential mortgages, changes in accounting standards, and Federal Deposit
Insurance Corporation
(“FDIC”) premiums that may adversely affect the Company;

(11) the application of generally accepted accounting principles in the United
States of America
(“U.S. GAAP”), consistently applied;

(12) the fact that one period of reported results may not be indicative of
future periods;


(13) the state of the economy in the greater New York metropolitan area and its
particular effect on the Company's customers, vendors and communities and other
such factors, including risk factors, as may be described in the Company's other
filings with the Securities and Exchange Commission (the "SEC");

(14) political, social, legal and economic instability, civil unrest, war,
catastrophic events, acts of terrorism;

(15) widespread outbreaks of infectious diseases, including the ongoing novel
coronavirus (COVID-19) outbreak;

(16) changes in the level and direction of loan delinquencies and write-offs and
changes in estimates of the adequacy of the allowance for loan losses;

(17) our ability to access cost-effective funding;

(18) our ability to implement and change our business strategies;

(19) changes in the quality or composition of our loan or investment portfolios;

(20) technological changes that may be more difficult or expensive than
expected;

(21) our ability to manage market risk, credit risk and operational risk in the
current economic environment;

(22) our ability to enter new markets successfully and capitalize on growth
opportunities;

(23) changes in consumer spending, borrowing and savings habits;

(24) our ability to retain key employees; and

(25) our compensation expense associated with equity allocated or awarded to our
employees.




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The risks and uncertainties included here are not exhaustive. In addition to
those included herein further information concerning our business, including
additional factors that could materially affect our financial results, is
included in our other filings with the SEC, including our Annual Report on Form
10-K for the year ended December 31, 2021. Further, it is not possible to assess
the effect of all risk factors on our businesses or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results. In addition, we disclaim any
obligation to update any forward-looking statements to reflect events or
circumstances that occur after the date of this report.





CRITICAL ACCOUNTING POLICIES



The preparation of consolidated financial statements in accordance with U.S.
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 the 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
most critical accounting policies and estimates in that they are important to
the portrayal of the Company's financial condition and results of operations.
They require management's most subjective and complex judgment as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. Refer to the 2021 Form 10-K for additional information.





Summary



The Company reported net income for the second quarter of 2022 of $1.3 million
($0.32 basic and diluted earnings per share), compared to a net income of $1.0
million ($0.26 basic and diluted earnings per share) for the second quarter of
2021. For the six months ended June 30, 2022, net income was $2.1 million ($0.52
basic and diluted earnings per share), compared to a net income of $1.9 million
($0.48 basic and $0.47 diluted earnings per share) for the six months ended June
30, 2021. The prior year results included the recognition of a non-recurring
employee retention tax credit ("ERC") of $1.1 million and $2.0 million for the
three and six months ended June 30, 2021, respectively, while no ERC was
recognized in the first half of 2022.



The Bank continued to show improved net interest margins and deposit growth. The
prepaid debit card program continues to be a low-cost funding source for the
Bank and has increased substantially to $166.7 million as of June 30, 2022 from
$50.0 million acquired in July 2020. The portfolio growth provides a substantial
improvement to the Bank's net interest margin and overall funding costs.



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Financial Condition



As of June 30, 2022, total assets increased $100.7 million to $1.0 billion, as
compared to $948.5 million at December 31, 2021, primarily due to the increase
in net loans which increased from $729.6 million at December 31, 2021, to $849.2
million at June 30, 2022. Total deposits increased from $748.6 million at
December 31, 2021, to $846.8 million at June 30, 2022.



Cash and Cash Equivalents



Cash and cash equivalents decreased $9.5 million, from $47.0 million at December
31, 2021 to $37.5 million at June 30, 2022. The decrease in 2022 was primarily
due to cash used for loan origination of $138.4 million and purchase of loans of
$98.7 million, which was partially offset by $116.0 million paydown of loans and
increase in deposits of $98.2 million.



Investments


The following table is a summary of the Company’s available-for-sale securities
portfolio, at fair value, at the dates shown:




(In thousands)                              June 30,       December 31,     

Increase / (Decrease)

                                              2022             2021              ($)              (%)
U. S. Government agency and
mortgage-backed securities                 $   54,085     $       66,629     $    (12,544 )       -18.83 %
Corporate bonds                                15,644             16,921           (1,277 )        -7.55 %
Subordinated notes                              1,921              4,626           (2,705 )       -58.47 %
SBA loan pools                                  4,822              5,603             (781 )       -13.94 %
Municipal bonds                                   499                562              (63 )       -11.21 %
Total available-for-sale securities, at
fair value                                     76,971             94,341    

(17,370 ) -18.41 %


Other investments, at cost                      4,450              4,450                -           0.00 %

                                           $   81,421     $       98,791     $    (17,370 )       -17.58 %




Total investments decreased by $17.4 million, from $98.8 million at December 31,
2021 to $81.4 million at June 30, 2022. The decrease in 2022 was primarily
attributable to the net unrealized loss of $13.0 million for the
available-for-sale securities, associated with rising market interest rates.
There were no sales of available-for-sale securities in the three and six months
ended June 30, 2022. During the three and six months ended June 30, 2021, the
Bank sold $20.8 million available for sale securities and recognized a net gain
of $93,000.



Loans held for investment


The following table provides the composition of the Company’s loan held for
investment portfolio as of June 30, 2022 and December 31, 2021:



(In thousands)                        June 30, 2022            December 31, 2021
                                   Amount          %          Amount          %
Loan portfolio segment:
Commercial Real Estate            $ 448,884        52.26 %   $ 365,247        49.38 %
Residential Real Estate             138,739        16.15 %     158,591        21.45 %
Commercial and Industrial           133,281        15.51 %     122,810        16.61 %
Consumer and Other                  122,858        14.30 %      59,364         8.03 %
Construction                         12,221         1.42 %      21,781         2.95 %
Construction to permanent - CRE       3,124         0.36 %      11,695         1.58 %
Loans receivable, gross             859,107       100.00 %     739,488       100.00 %
Allowance for loan losses            (9,929 )                   (9,905 )
Loans receivable, net             $ 849,178                  $ 729,583




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The Company's gross loan portfolio increased $119.6 million, from $739.5 million
at December 31, 2021 to $859.1 million at June 30, 2022. The increase in loans
was primarily attributable to $138.4 million of new loan origination and $98.7
million in purchases of loans receivable which was partially offset by $117.0
million paydown of the loans.



SBA loans held for investment were included in the commercial real estate loans
and commercial and industrial loan classifications above. As of June 30, 2022
and December 31, 2021, SBA loans included in the commercial and industrial loan
were $19.2 million and $17.4 million, respectively. SBA loans included in the
commercial real estate loans were $10.9 million and $9.7 million, respectively.



At June 30, 2022, the net loan to deposit ratio was 100% and the net loan to
total assets ratio was 81%. At December 31, 2021, these ratios were 97% and 77%,
respectively.


Allowance for Loan and Lease Losses




The allowance for loan and lease losses was unchanged at $9.9 million as of June
30, 2022 and December 31, 2021. Based upon the overall assessment and evaluation
of the loan portfolio at June 30, 2022, management believes $9.9 million in the
allowance for loan and lease losses, which represented 1.16% of gross loans
outstanding, is adequate under prevailing economic conditions to absorb existing
losses in the loan portfolio, and a provision for loan losses of $275,000 was
recorded for the three and six months ended June 30, 2022.



The following table provides detail of activity in the allowance for loan and
lease losses:



                                               Three Months Ended June 30,             Six Month Ended June 30,
(In thousands)                                 2022                  2021               2022               2021

Balance at beginning of the period         $       9,737         $      10,426      $      9,905        $   10,584
Charge-offs:
Commercial Real Estate                                 -                    (9 )               -               (51 )
Residential Real Estate                                -                     -                 -                (3 )
Commercial and Industrial                              -                     -               (68 )            (209 )
Consumer and Other                                  (100 )                  (2 )            (147 )             (20 )
Construction                                           -                   (69 )             (70 )             (69 )
Total charge-offs                                   (100 )                 (80 )            (285 )            (352 )
Recoveries:
Residential Real Estate                                -                     -                 1                 -
Commercial and Industrial                             11                    12                26                24
Consumer and Other                                     6                     4                 7               106
Total recoveries                                      17                    16                34               130

Net charge-offs                                      (83 )                 (64 )            (251 )            (222 )
Provision charged to earnings                        275                     -               275                 -
Balance at end of the period               $       9,929         $      10,362      $      9,929        $   10,362

Ratios:
Net charge-offs to average loans                  (0.011 )%             (0.009 )%         (0.032 )%         (0.032 )%
Allowance for loan losses to total loans            1.16 %                1.54 %            1.16 %            1.54 %




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The following table provides an allocation of allowance for loan and lease
losses by portfolio segment:




(In thousands)                                June 30, 2022                        December 31, 2021
                                                         Percent of                                Percent of
                                                           loans                                     loans
                                                          in each                                   in each
                                      Allowance for       category                                  category
                                          loan            to total        Allowance for loan        to total
Allowance for loan and lease losses      losses            loans                losses               loans
Commercial Real Estate                $       4,980            52.26 %   $              5,063            49.38 %
Residential Real Estate                       1,395            16.15 %                  1,700            21.45 %
Commercial and Industrial                     2,316            15.51 %                  2,532            16.61 %
Consumer and Other                            1,063            14.30 %                    253             8.03 %
Construction                                     58             1.42 %                     78             2.95 %
Construction to permanent - CRE                  15             0.36 %                     41             1.58 %
Unallocated                                     102              N/A                      238              N/A
Total                                 $       9,929           100.00 %   $              9,905           100.00 %






Non-performing Assets



The following table presents non-performing assets as of June 30, 2022 and
December 31, 2021:



(In thousands)
                                                     June 30, 2022       December 31, 2021
Non-accruing loans:
Commercial Real Estate                              $        15,366     $            15,704
Residential Real Estate                                       3,087                   3,148
Commercial and Industrial                                     4,726                   4,101
Consumer and Other                                              145                     142
Total non-accruing loans                                     23,324                  23,095

Loans past due over 90 days and still accruing                    -                       2
Total nonperforming assets                          $        23,324     $   

23,097


Nonperforming assets to total assets                           2.22 %                  2.44 %
Nonperforming loans to total loans, net                        2.75 %                  3.17 %




As of June 30, 2022, the $23.3 million of non-accrual loans was comprised of 32
borrowers, for which a specific reserve of $2.9 million was established. Four
TDR loans of total $9.7 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. Non-accrual loans are included
in the impaired loans.



As of December 31, 2021, the $23.1 million of non-accrual loans was comprised of
30 borrowers, for which a specific reserve of $2.3 million was established.
Three TDR loans of total $9.7 million were included in the non-accrual loans as
of December 31, 2021.



Loans held for sale



SBA loans held for sale totaled $7.6 million and $3.1 million as of June 30,
2022 and December 31, 2021, respectively. SBA loans held for sale represent the
guaranteed portion of SBA loans and are reflected at the lower of aggregate cost
or market value. SBA loans held for sale at June 30, 2022, consisted of $4.3
million SBA commercial real estate and $3.3 million SBA commercial and
industrial loans, respectively. SBA loans held for sale at December 31, 2021,
consisted of $2.6 million SBA commercial and industrial loans and $562,000 SBA
commercial real estate, respectively.



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Goodwill


The Company completed its acquisition of Prime Bank in May 2018 and recorded
$1.1 million of goodwill after adjustments as of May 10, 2019. No further
adjustment to the goodwill was made as of June 30, 2022.

The Company did not perform an interim goodwill test for the six months ended
June 30, 2021 as no events occurred which would trigger an impairment
assessment.




Deferred Taxes



Deferred tax assets were $14.9 million and $12.1 million at June 30, 2022 and
December 31, 2021, respectively. Deferred tax assets consist predominately of
state net operating losses, capitalized costs and allowances for loan losses.



The effective tax rate for the three and six months ended June 30, 2022 was
27.3%, and 27.6%, respectively, compared to the effective tax rate of 27.3% and
27.2% for the three and six months ended June 30, 2021, respectively. The
Company's effective rates for both periods were affected primarily by states
taxes and non-deductible expenses.



Patriot anticipates utilizing the state net operating loss carry forwards to
reduce income taxes otherwise payable on current and future years taxable
income.




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 state net operating
loss carry-forwards that do not begin to expire until the year of 2030. As of
December 31, 2021, after weighing both positive and negative evidence, Patriot
fully reversed the valuation allowance of $1.9 million recorded in 2020. No
valuation allowance was recorded as of June 30, 2022. The Company 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 additional deferred tax
assets will not be realized, the valuation allowance will be adjusted.



Deposits



The following table is a summary of the Company's deposits at the dates shown:



(In thousands)                                                                  Increase/(Decrease)
                                June 30, 2022       December 31, 2021             $               %
Non-interest bearing:
Non-interest bearing           $       137,320     $           127,420     $       9,900             7.77 %
Prepaid DDA                            133,845                  99,293            34,552            34.80 %
Total non-interest bearing             271,165                 226,713            44,452            19.61 %

Interest bearing:
Negotiable order of
withdrawal accounts                     35,973                  34,741             1,232             3.55 %
Savings                                 99,686                 109,744           (10,058 )          (9.16 )%
Money market                           151,212                 113,428            37,784            33.31 %
Money market - prepaid
deposits                                32,891                  51,090           (18,199 )         (35.62 )%
Certificates of deposit,
less than $250,000                     169,690                 142,246            27,444            19.29 %
Certificates of deposit,
$250,000 or greater                     51,491                  53,584            (2,093 )          (3.91 )%
Brokered deposits                       34,675                  17,016            17,659           103.78 %
Total Interest bearing                 575,618                 521,849            53,769            10.30 %

Total Deposits                 $       846,783     $           748,562     $      98,221            13.12 %



The Bank has expanded its deposit and funding mix over the past year, while
reducing its aggregate cost of funds.

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Borrowings



Total borrowings were $130.6 million and $120.7 million as of June 30, 2022 and
December 31, 2021, respectively. Borrowings consist primarily of FHLB advances,
senior notes, subordinated notes, junior subordinated debentures and a note
payable. The senior notes, subordinated notes and 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.



FHLB-B advances are structured to facilitate the Bank's management of its
balance sheet and liquidity requirements. Outstanding advances from the FHLB-B
increased from $90.0 million at December 31, 2021 to $100.0 million at June 30,
2022.


At June 30, 2022, the FHLB-B advances bore fixed rates of interest ranging from
1.64% to 4.23% with maturities ranging from 5 days to 2.2 years, and have a
weighted average interest rate of 3.09%.




At June 30, 2022, collateral for FHLB-B borrowings consisted of a mixture of
real estate loans and securities with book value of $267.2 million. Remaining
unused borrowing capacity under this line totaled $77.3 million at June 30,
2022.



In addition, Patriot has a $2.0 million revolving line of credit with the
FHLB-B. For the three and six months ended June 30, 2022 and 2021, no funds had
been borrowed under the line of credit.




Interest expense incurred for the three and six months ended June 30, 2022 were
$747,000 and $1.5 million, respectively. For the three and six months ended June
30, 2021, interest expense were $741,000 and $1.5 million, respectively.



Correspondent Bank – Line of Credit




Patriot has entered into unsecured federal funds sweep and federal funds line of
credit facility agreements with certain correspondent banks. Borrowings
available under the agreements totaled $5 million at June 30, 2022 and
$5 million at December 31, 2021. 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, Automated Clearing
House (ACH), and other clearinghouse transactions.



There was no outstanding balance under the agreements at June 30, 2022 and
December 31, 2021. No interest expense incurred for the three and six months
ended June 30, 2022 and 2021.



Other Borrowing



Patriot has pledged eligible loans as collateral to support borrowing capacity
at the Federal Reserve Bank of New York's ("FRBNY"). As of June 30, 2022, the
book value of the pledged loans totaled $20.6 million with a collateral value of
$14.6 million. There was no outstanding balance under the FRBNY
Borrower-in-Custody program at June 30, 2022.



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Senior notes



On December 22, 2016, the Company issued $12 million of senior notes bearing
interest at 7% per annum (the "Senior Notes"). On November 17, 2021, the
original maturity date of the Senior Notes was extended from December 22, 2021
to June 30, 2022.



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 June 30, 2022 and December
31, 2021, the debt issuance costs were fully amortized.



On June 22, 2022, the Company amended and restated the Senior Notes. The
maturity date of the Senior Notes was further extended to December 31, 2022, and
the interest rate increases from (i) 7% to 7.25% from July 1, 2022 until
September 30, 2022 and (ii) from 7.25% to 7.50% thereafter. The Senior Notes can
be repaid at any time without penalty.



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 three and six months ended June 30, 2022, the Company recognized
interest expense of $210,000 and $420,000, respectively. For the three and six
months ended June 30, 2021, the Company recognized interest expense of $228,000
and $457,000, 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 bears 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.



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 June 30,
2022 and December 31, 2021, $175,000 and $189,000 of unamortized debt issuance
costs were deducted from the face amount of the Subordinated Notes included in
the consolidated balance sheet, respectively.



For the three and six months ended June 30, 2022, the Company recognized
interest expense of $165,000 and $328,000, respectively. For the three and six
months ended June 30, 2021, the Company recognized interest expense of $165,000
and $328,000, 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.



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The junior subordinated debentures bear interest at three-month LIBOR plus 3.15%
(5.34% at June 30, 2022) and mature on March 26, 2033, at which time the
principal amount borrowed will be due. 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. As of June 30, 2022 and December 31, 2021, the unamortized placement
fee deducted from the face amount of the junior subordinated debt owed to the
unconsolidated trust amounted to $125,000 and $129,000, respectively, and
accrued interest on the junior subordinated debentures was $6,000 and $4,000,
respectively.



For the three and six months ended June 30, 2022, the Company recognized
interest expense of $86,000 and $157,000, respectively. For the three and six
months ended June 30, 2021, the Company recognized interest expense of $70,000
and $140,000, 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 June 30, 2022 and December 31, 2021,
the note had a balance outstanding of $689,000 and $791,000, respectively. The
note matures in August 2024 and requires a balloon payment of approximately
$234,000 at that time. The note is secured by a first Mortgage Deed and Security
Agreement on the purchased property.



For the three and six months ended June 30, 2022, the Company recognized
interest expense of $2,000 and $6,000, respectively. For the three and six
months ended June 30, 2021, the Company recognized interest expense of $4,000
and $8,000, respectively.



Derivatives



As of June 30, 2022, 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 no gain on the swaps for the three and six months ended June 30, 2022
and 2021, respectively.



During the second quarter of 2021, Patriot entered into a receive fixed/pay
variable interest rate swap, which was designated as a cash flow hedge. During
the three and six month ended June 30, 2021, the Company recognized $85,000 of
accumulated other comprehensive income that was reclassified into interest
income included in interest and fees on loans on the consolidated statements of
operations. The cash flow hedge interest rate swap contract was terminated in
August 2021. Therefore, no interest income was recognized during the three and
six months ended June 30, 2022.



Further discussion of the fair value of derivatives is set forth in Note 8 to
the consolidated financial statements.



Equity


Equity decreased $7.5 million, from $67.3 million at December 31, 2021 to $59.8
million
at June 30, 2022, primarily due to $9.6 million of net unrealized
holding loss for investment portfolio, which was partially offset by $2.1
million
of net income for the six months ended June 30, 2022.

Off-Balance Sheet Commitments

The Company’s off-balance sheet commitments, which primarily consist of
commitments to lend, increased $53.1 million from $127.0 million at December 31,
2021
to $180.1 million at June 30, 2022.

                                       49
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Average Balances


The following tables present daily average balance sheets, interest income,
interest expense and the corresponding yields earned and rates paid for the
three and six months ended June 30, 2022 and 2021:





(In thousands)                                           Three Months ended June 30,
                                               2022                                       2021
                                Average                                    Average
                                Balance        Interest       Yield        Balance       Interest       Yield
ASSETS
Interest Earning Assets:
Loans                         $   819,532     $    9,044         4.43 %   $ 680,710     $    7,267         4.28 %
Investments                        91,622            575         2.51 %      94,548            477         2.02 %
Cash equivalents and other         34,862             68         0.78 %      69,647             23         0.13 %

Total interest earning
assets                            946,016          9,687         4.11 %     844,905          7,767         3.69 %

Cash and due from banks             6,904                                     2,946
Allowance for loan losses          (9,695 )                                 (10,432 )
OREO                                    -                                     1,216
Other assets                       67,246                                    60,601

Total Assets                  $ 1,010,471                                 $ 899,236

Liabilities
Interest bearing
liabilities:
Deposits                      $   576,310     $      757         0.53 %   $ 522,219     $      623         0.48 %
Borrowings                         91,868            747         3.26 %      90,061            741         3.30 %
Senior notes                       12,000            210         7.00 %      11,953            228         7.63 %
Subordinated debt                  17,942            251         5.61 %      17,905            233         5.22 %
Note Payable and other                703              2         1.14 %         905              4         1.77 %

Total interest bearing
liabilities                       698,823          1,967         1.13 %     643,043          1,829         1.14 %

Demand deposits                   239,082                                   184,131
Other liabilities                  10,707                                     7,398

Total Liabilities                 948,612                                   834,572

Shareholders' equity               61,859                                    64,664

Total Liabilities and
Shareholders' Equity          $ 1,010,471                                 $ 899,236

Net interest income                           $    7,720                                $    5,938

Interest margin                                                  3.27 %                                    2.82 %
Interest spread                                                  2.98 %                                    2.55 %




                                       50
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(In thousands)                                          Six Months ended June 30,
                                              2022                                     2021
                               Average                                  Average
                               Balance      Interest       Yield        Balance      Interest       Yield
ASSETS
Interest Earning Assets:
Loans                         $ 784,091     $  16,708         4.30 %   $ 691,564     $  15,010         4.38 %
Investments                      97,441         1,210         2.48 %      78,270           821         2.10 %
Cash equivalents and other       37,282            89         0.48 %      67,873            47         0.14 %

Total interest earning
assets                          918,814        18,007         3.95 %     837,707        15,878         3.82 %

Cash and due from banks           7,584                                    2,910
Allowance for loan losses        (9,788 )                                (10,541 )
OREO                                  -                                    1,392
Other assets                     67,880                                   60,796

Total Assets                  $ 984,490                                $ 892,264

Liabilities
Interest bearing
liabilities:
Deposits                      $ 552,734     $   1,166         0.43 %   $ 525,872     $   1,408         0.54 %
Borrowings                       93,542         1,484         3.20 %      90,417         1,474         3.29 %
Senior notes                     12,000           420         7.00 %      11,944           457         7.65 %
Subordinated debt                17,938           485         5.45 %      17,900           467         5.26 %
Note Payable and other              730             6         1.66 %         931             8         1.73 %

Total interest bearing
liabilities                     676,944         3,561         1.06 %     647,064         3,814         1.19 %

Demand deposits                 233,111                                  172,922
Other liabilities                10,305                                    7,821

Total Liabilities               920,360                                  827,807

Shareholders' equity             64,130                                   64,457

Total Liabilities and
Shareholders' Equity          $ 984,490                                $ 892,264

Net interest income                         $  14,446                                $  12,064

Interest margin                                               3.17 %                                   2.90 %
Interest spread                                               2.89 %                                   2.63 %




                                       51
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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 three and six months ended June 30,
2022 and 2021.



                            Three Months ended June 30,                   Six Months ended June 30,
                               2022 compared to 2021                        2022 compared to 2021
(In thousands)                  Increase/(Decrease)                          Increase/(Decrease)
                       Volume            Rate          Total         Volume           Rate          Total
Interest Earning
Assets:
Loans                $    1,231       $      546     $   1,777     $    1,669       $      29     $   1,698
Investments                 (14 )            112            98            204             185           389
Cash equivalents
and other                   (11 )             56            45            (21 )            63            42

Total interest
earning assets            1,206              714         1,920          1,852             277         2,129

Interest bearing
liabilities:
Deposit                     181              (47 )         134            147            (389 )        (242 )
Borrowings                   15               (9 )           6             51             (41 )          10
Senior notes                  1              (19 )         (18 )            2             (39 )         (37 )
Subordinated debt             -               18            18              -              18            18
Note payable and
other                        (2 )              -            (2 )           (2 )             -            (2 )

Total interest
bearing
liabilities                 195              (57 )         138            198            (451 )        (253 )

Net interest
income               $    1,011       $      771     $   1,782     $    1,654       $     728     $   2,382






RESULTS OF OPERATIONS



For the three months ended June 30, 2022, interest income and dividend income
was $9.7 million, which increased $1.9 million or 24.7% as compared to $7.8
million for the quarter ended June 30, 2021. Total interest expense was $2.0
million, which increased $138,000 or 7.5% as compared to $1.8 million for the
quarter ended June 30, 2021. Net interest income was $7.7 million for the
quarter ended June 30, 2022, which increased $1.8 million or 30.0% from $5.9
million for the quarter ended June 30, 2021.



For the six months ended June 30, 2022, interest income and dividend income was
$18.0 million, which increased $2.1 million or 13.4% as compared to $15.9
million for the six months ended June 30, 2021. Total interest expense was $3.6
million, which decreased $253,000 or 6.6% as compared to $3.8 million for the
six months ended June 30, 2021. Net interest income was $14.4 million for the
six months ended June 30, 2022, which increased $2.4 million or 19.7% from $12.1
million for the six months ended June 30, 2021. The increase in 2022 was
primarily due to increase in average loan balances partially offset by an
increase in average deposits balances.



The net interest margin showed continued improvement, with an increase to 3.27%
for the quarter ended June 30, 2022, compared with 2.82% for the second quarter
of 2021. For the six months ended June 30, 2022, the net interest margin
increased to 3.17%, compared to 2.90% for the six months ended June 30, 2021.



Provision for Loan Losses



For the three and six months ended June 30, 2022, a provision for loan losses of
$275,000 was recorded, compared to zero provision for loan losses for the three
and six months ended June 30, 2021.



                                       52
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Non-interest income



Non-interest income for the three and six months ended June 30, 2022 was
$798,000 and $1.6 million, respectively, as compared to $753,000 and $1.2
million for the three and six months ended June 30, 2021, respectively. The
increases were primarily attributable to increased gains on sales of SBA loans
along with higher non-interest income from the prepaid card program in the first
half of 2022.



Non-interest expense



Non-interest expense for the three and six months ended June 30, 2022 increased
to $6.5 million and $12.9 million, respectively, as compared to $5.3 million and
$10.7 million for the three and six months ended June 30, 2021. The non-interest
expense in the first half of 2021 included an ERC of $2.0 million, while no ERC
was recognized in the first half of 2022.



Provision for income taxes



The Company reported provision for income taxes of $476,000 and $787,000 for the
three and six months ended June 30, 2022, respectively, as compared to a
provision for income taxes of $383,000 and $702,000 for the three and six months
ended June 30, 2021, respectively.



Liquidity



The Company's balance sheet liquidity to total assets ratio was 8.7% at June 30,
2022, compared to 11.4% at December 31, 2021. Liquidity including readily
available off-balance sheet funding sources was 18.2% at June 30, 2022, compared
to 21.7% at December 31, 2021.



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), loans held for sale, and unpledged available-for-sale securities. In
addition, off balance sheet funding sources include collateral based borrowing
available from the FHLB, correspondent bank borrowing lines, and brokered
deposits subject to internal limitations.



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.



Management manages its capital resources by seeking to maintain a capital
structure that will ensure an adequate level of capital to support anticipated
asset growth and absorb potential losses while effectively leveraging capital to
enhance profitability and return to shareholders. Dividends have not been paid
to shareholders since 2020, but may resume in future periods.



The primary source of liquidity at the Company is returns of capital from the
Bank. These capital returns are subject to OCC approval and are needed
periodically to provide funds needed to service debt payments at the Company.




Capital



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. In September 2021, the Bank adopted the CBLR
framework. The Bank's Tier 1 leverage ratio as of June 30, 2022 and December 31,
2021 was 9.44% and 9.86%, respectively, which is above the well-capitalized
required level of 9.0%.



Management continuously assesses the adequacy of the Bank’s capital with the
goal to maintain a “well capitalized” classification.

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IMPACT OF INFLATION AND CHANGING PRICES




The Company's consolidated financial statements have been prepared in terms of
historical dollars, without considering changes in the 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 a
financial institution's performance than the effect of general levels of
inflation. Interest rates do not necessarily move in the same direction or with
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, deflation or disinflation could significantly affect the
Company's earnings in future periods.

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