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.
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 and nine months ended September 30, 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.
The COVID-19 pandemic has resulted in significant economic disruption affecting our business and the clients we serve. As vaccination efforts continue, restrictions on businesses have been lifted and a return to more normal economic activity has begun. However, the extent of the remaining impact will depend on future developments, which are uncertain. While not expected, a surge in the impact of the pandemic on business conditions 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.
10
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 while the Biden administration adopted another $1.9 trillion stimulus package in March 2021.
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 for 2020. In 2021, the tax credit is up to $7,000 for each quarter, equal to 70% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee per quarter. The Company adopted a policy to recognize the employee retention credit when earned and to recognize the credit as a reduction to compensation and benefits expense on the Company’s consolidated statements of operations. Accordingly, the Company recorded an employee retention credit of $906,000 and $2.9 million for the three and nine months ended September 30, 2021, respectively, which is included in non-interest expense on the consolidated statements of operations.
Derivative Instruments and Hedging Activities
Derivatives are recognized at fair value and included in other assets and other liabilities in the accompanying consolidated balance sheets. The value of exchange-traded contracts is based on quoted market prices while non-exchange traded contracts are valued based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require management judgment or estimation, relating to future rates and credit activities. Cash flows from derivative financial instruments are included in net cash provided by operating activities in the accompanying consolidated statements of cash flows.
Derivatives Designated in Hedge Relationships. The Company uses derivatives to hedge exposures, or to modify interest rate characteristics, for certain balance sheet accounts under its interest rate risk management strategy. The Company designates derivatives in qualifying hedge relationships as cash flow hedges for accounting purposes. Derivative financial instruments receive hedge accounting treatment if they are qualified and properly designated as a hedge and remain highly effective in offsetting changes in the cash flows attributable to the risk being hedged both at hedge inception and on an ongoing basis throughout the life of the hedge. Quarterly prospective and retrospective assessments are performed to ensure hedging relationships continue to be highly effective. If a hedge relationship were no longer highly effective, hedge accounting would be discontinued. The gain or loss on a derivative designated and qualifying as a cash flow hedge is initially recorded as a component of accumulated other comprehensive income or loss, net of tax and subsequently reclassified to interest income as hedged interest payments are received or to interest expense as hedged interest payments are made in the same period during which the hedged transaction affects earnings.
Further discussion of the derivatives is set forth in Note 8 to the consolidated financial statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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.
ASU Update 2020-04
ASU No. 2020-04, Reference Rate Reform (Topic 848): "Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying 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. Optional expedients include that modifications of contracts should be accounted for by prospectively adjusting the effective interest rate and modifications of leases should be accounted for as a continuation of the existing contract with no reassessments of lease classification and discount rate or remeasurements of lease payments. This ASU also provides many practical expedients for derivative accounting. In addition, an entity may elect to sell and/or transfer held to maturity securities that reference a rate affected by the reference rate reform classified as held to maturity prior to January 1, 2020. In particular, the Company made the following elections as it relates to hedging relationships, to continue the method of assessing effectiveness as documented in the original hedge documentation and apply the expedient in ASC 848-50-35-17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. The application of this guidance did not have a material impact on the Company's financial statements.
ASU 2021-01
In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848)”. This ASU clarifies certain optional expedients and exceptions in Topic 848 when accounting for derivative contracts and certain hedging relationships affected by changes in interest rates. The amendments are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The Update was effective upon issuance for application on either a retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 22, 2020, or on a prospective basis beginning on January 7, 2021. The Company adopted the Update on a prospective basis. The adoption of this guidance did not have a material impact on the Company's 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.
13
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 September 30, 2021 and December 31, 2020 are as follows:
(In thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Fair
Value
|
|
September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency and mortgage-backed securities
|
|
$
|
89,557
|
|
|
$
|
154
|
|
|
$
|
(693
|
)
|
|
$
|
89,018
|
|
Corporate bonds
|
|
|
20,005
|
|
|
|
308
|
|
|
|
(91
|
)
|
|
|
20,222
|
|
Subordinated notes
|
|
|
4,608
|
|
|
|
67
|
|
|
|
(5
|
)
|
|
|
4,670
|
|
SBA loan pools
|
|
|
9,836
|
|
|
|
3
|
|
|
|
(205
|
)
|
|
|
9,634
|
|
Municipal bonds
|
|
|
562
|
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
559
|
|
|
|
$
|
124,568
|
|
|
$
|
533
|
|
|
$
|
(998
|
)
|
|
$
|
124,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency and mortgage-backed securities
|
|
$
|
16,719
|
|
|
$
|
131
|
|
|
$
|
(17
|
)
|
|
$
|
16,833
|
|
Corporate bonds
|
|
|
18,014
|
|
|
|
260
|
|
|
|
(984
|
)
|
|
|
17,290
|
|
Subordinated notes
|
|
|
9,036
|
|
|
|
97
|
|
|
|
(128
|
)
|
|
|
9,005
|
|
SBA loan pools
|
|
|
5,627
|
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
5,567
|
|
Municipal bonds
|
|
|
564
|
|
|
|
3
|
|
|
|
-
|
|
|
|
567
|
|
|
|
$
|
49,960
|
|
|
$
|
491
|
|
|
$
|
(1,189
|
)
|
|
$
|
49,262
|
|
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 September 30, 2021 and December 31, 2020:
(In thousands)
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
(Loss)
|
|
|
Fair
Value
|
|
|
Unrealized
(Loss)
|
|
|
Fair
Value
|
|
|
Unrealized
(Loss)
|
|
September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency and mortgage-backed securities
|
|
$
|
49,299
|
|
|
$
|
(693
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
49,299
|
|
|
$
|
(693
|
)
|
Corporate bonds
|
|
|
1,903
|
|
|
|
(91
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,903
|
|
|
|
(91
|
)
|
Subordinated notes
|
|
|
-
|
|
|
|
-
|
|
|
|
1,103
|
|
|
|
(5
|
)
|
|
|
1,103
|
|
|
|
(5
|
)
|
SBA loan pools
|
|
|
5,815
|
|
|
|
(169
|
)
|
|
|
3,268
|
|
|
|
(36
|
)
|
|
|
9,083
|
|
|
|
(205
|
)
|
Municipal bonds
|
|
|
404
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
404
|
|
|
|
(4
|
)
|
|
|
$
|
57,421
|
|
|
$
|
(957
|
)
|
|
$
|
4,371
|
|
|
$
|
(41
|
)
|
|
$
|
61,792
|
|
|
$
|
(998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency and mortgage-backed securities
|
|
$
|
5,797
|
|
|
$
|
(14
|
)
|
|
$
|
1,476
|
|
|
$
|
(3
|
)
|
|
$
|
7,273
|
|
|
$
|
(17
|
)
|
Corporate bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
13,015
|
|
|
|
(984
|
)
|
|
|
13,015
|
|
|
|
(984
|
)
|
Subordinated notes
|
|
|
1,878
|
|
|
|
(122
|
)
|
|
|
1,103
|
|
|
|
(6
|
)
|
|
|
2,981
|
|
|
|
(128
|
)
|
SBA loan pools
|
|
|
1,533
|
|
|
|
(12
|
)
|
|
|
4,034
|
|
|
|
(48
|
)
|
|
|
5,567
|
|
|
|
(60
|
)
|
|
|
$
|
9,208
|
|
|
$
|
(148
|
)
|
|
$
|
19,628
|
|
|
$
|
(1,041
|
)
|
|
$
|
28,836
|
|
|
$
|
(1,189
|
)
|
At September 30, 2021 and December 31, 2020, 31 of 50 and 22 of 37 available-for-sale securities had unrealized losses with an aggregate decline of 1.6% and 4.0% from the amortized cost of those securities, respectively.
14
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 September 30, 2021.
As of September 30, 2021 and December 31, 2020, available-for-sale securities of $60.9 million and $6.1 million, respectively, were pledged to the Federal Reserve Bank (“FRB”). The securities were pledged primarily to secure borrowings from the Federal Home Loan Bank and municipal deposits.
The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held as of September 30, 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.
(In thousands)
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
Due
Within
5 years
|
|
|
Due After
5 years
through
10 years
|
|
|
Due
After
10 years
|
|
|
Total
|
|
|
Due
Within
5 years
|
|
|
Due After
5 years
through
10 years
|
|
|
Due
After
10 years
|
|
|
Total
|
|
September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
20,005
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,005
|
|
|
$
|
20,222
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,222
|
|
Subordinated notes
|
|
|
-
|
|
|
|
4,608
|
|
|
|
-
|
|
|
|
4,608
|
|
|
|
-
|
|
|
|
4,670
|
|
|
|
-
|
|
|
|
4,670
|
|
SBA loan pools
|
|
|
1,353
|
|
|
|
2,498
|
|
|
|
5,985
|
|
|
|
9,836
|
|
|
|
1,340
|
|
|
|
2,478
|
|
|
|
5,816
|
|
|
|
9,634
|
|
Municipal bonds
|
|
|
-
|
|
|
|
562
|
|
|
|
-
|
|
|
|
562
|
|
|
|
-
|
|
|
|
559
|
|
|
|
-
|
|
|
|
559
|
|
Available-for-sale securities with stated maturity dates
|
|
|
21,358
|
|
|
|
7,668
|
|
|
|
5,985
|
|
|
|
35,011
|
|
|
|
21,562
|
|
|
|
7,707
|
|
|
|
5,816
|
|
|
|
35,085
|
|
U. S. Government agency and mortgage-backed securities
|
|
|
18,789
|
|
|
|
287
|
|
|
|
70,481
|
|
|
|
89,557
|
|
|
|
18,707
|
|
|
|
289
|
|
|
|
70,022
|
|
|
|
89,018
|
|
|
|
$
|
40,147
|
|
|
$
|
7,955
|
|
|
$
|
76,466
|
|
|
$
|
124,568
|
|
|
$
|
40,269
|
|
|
$
|
7,996
|
|
|
$
|
75,838
|
|
|
$
|
124,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
4,014
|
|
|
$
|
14,000
|
|
|
$
|
-
|
|
|
$
|
18,014
|
|
|
$
|
4,274
|
|
|
$
|
13,016
|
|
|
$
|
-
|
|
|
$
|
17,290
|
|
Subordinated notes
|
|
|
2,000
|
|
|
|
7,036
|
|
|
|
-
|
|
|
|
9,036
|
|
|
|
2,003
|
|
|
|
7,002
|
|
|
|
-
|
|
|
|
9,005
|
|
SBA loan pools
|
|
|
1,921
|
|
|
|
3,706
|
|
|
|
-
|
|
|
|
5,627
|
|
|
|
1,899
|
|
|
|
3,668
|
|
|
|
-
|
|
|
|
5,567
|
|
Municipal bonds
|
|
|
-
|
|
|
|
564
|
|
|
|
-
|
|
|
|
564
|
|
|
|
-
|
|
|
|
567
|
|
|
|
-
|
|
|
|
567
|
|
Available-for-sale securities with stated maturity dates
|
|
|
7,935
|
|
|
|
25,306
|
|
|
|
-
|
|
|
|
33,241
|
|
|
|
8,176
|
|
|
|
24,253
|
|
|
|
-
|
|
|
|
32,429
|
|
U. S. Government agency and mortgage-backed securities
|
|
|
3,364
|
|
|
|
1,466
|
|
|
|
11,889
|
|
|
|
16,719
|
|
|
|
3,363
|
|
|
|
1,491
|
|
|
|
11,979
|
|
|
|
16,833
|
|
|
|
$
|
11,299
|
|
|
$
|
26,772
|
|
|
$
|
11,889
|
|
|
$
|
49,960
|
|
|
$
|
11,539
|
|
|
$
|
25,744
|
|
|
$
|
11,979
|
|
|
$
|
49,262
|
|
15
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
During the nine months ended September 30, 2021, the Bank purchased $112.0 million U.S. Government agency debt and mortgage-backed securities, $18.2 million Corporate bonds, and $5.9 million SBA government guaranteed loan pools securities. In 2021, the Bank sold $32.4 million U.S. Government agency mortgage-backed securities, $16.3 million corporate bonds, $4.5 million subordinated notes, and $535,000 SBA loan pools securities, and recognized a net gain on sale of securities of $26,000 and $119,000 during the three and nine months ended September 30, 2021, respectively. During the nine months ended September 30, 2020, the Bank purchased $4.9 million U.S. Government agency mortgage-backed securities, $988,000 SBA government guaranteed loan pools securities and $565,000 municipal bonds. There was no sale of available-for-sale securities in the nine months ended September 30, 2020.
Note 4. Loans Receivable and Allowance for Loan and Lease Losses
As of September 30, 2021 and December 31, 2020, loans receivable, net, consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2021
|
|
|
2020
|
|
Loan portfolio segment:
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
315,853
|
|
|
$
|
282,378
|
|
Residential Real Estate
|
|
|
171,800
|
|
|
|
153,851
|
|
Commercial and Industrial
|
|
|
119,688
|
|
|
|
144,297
|
|
Consumer and Other
|
|
|
53,676
|
|
|
|
67,635
|
|
Construction
|
|
|
41,609
|
|
|
|
66,984
|
|
Construction to Permanent - CRE
|
|
|
11,912
|
|
|
|
15,035
|
|
Loans receivable, gross
|
|
|
714,538
|
|
|
|
730,180
|
|
Allowance for loan and lease losses
|
|
|
(10,079
|
)
|
|
|
(10,584
|
)
|
Loans receivable, net
|
|
$
|
704,459
|
|
|
$
|
719,596
|
|
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 65% 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 and nine months ended September 30, 2021, Patriot purchased $29.6 million and $72.3 million of residential real estate loans, respectively. During the three and nine months ended September 30, 2020, Patriot purchased $2.5 million and $16.6 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 $27.8 million and $55.0 million at September 30, 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. However, since 2020, Patriot has discontinued participating in SNC loans and allowed the existing portfolio to run off.
Consumer and Other Loans
Patriot offers individual consumers various forms of credit including installment loans, credit cards, overdraft protection, auto loans and reserve lines of credit. Repayments of such loans are generally dependent on the personal income of the borrower, which may be negatively impacted by adverse changes in economic conditions. The Company does not place a high emphasis on originating these types of loans.
The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories that are typically characterized by payment delinquencies, previous charge-offs, judgments against the consumer, a history of bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.
During the three and nine months ended September 30, 2021, Patriot purchased $5.8 million and $7.9 million unsecured consumer loans, respectively. During the three and nine months ended September 30, 2020, Patriot purchased $0 and $14.9 million of education loans, respectively.
Construction Loans
Construction loans are of a short-term nature, generally of eighteen months or less, that are secured by land and improvements intended for commercial, residential, or mixed-use development. Loan proceeds may be used for the acquisition of or improvements to the land under development and funds are generally disbursed as phases of construction are completed.
17
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Included in this category are loans to construct single family homes where no contract of sale exists, based upon the experience and financial strength of the builder, the type and location of the property, and other factors. Construction loans tend to be personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by an inability to complete construction, a downturn in the market for new construction, by a significant increase in interest rates, or by decline in general economic conditions.
Construction to Permanent - Commercial Real Estate (“CRE”)
Loans in this category represent a one-time close of a construction facility with simultaneous conversion to an amortizing mortgage loan. Construction to Permanent loans combine a short term period similar to a construction loan, generally with a variable rate, and a longer term CRE loan typically 10 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% to 90% 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 $26.8 million and $21.6 million as of September 30, 2021 and December 31, 2020, respectively. During the nine-month period ended September 30, 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 totaled $1.9 million as of September 30, 2021, which are included in the commercial and industrial loan classifications.
18
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 and nine months ended September 30, 2021 and 2020:
(In thousands)
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Commercial
and
Industrial
|
|
|
Consumer
and
Other
|
|
|
Construction
|
|
|
Construction
to
Permanent
- CRE
|
|
|
Unallocated
|
|
|
Total
|
|
Three months ended September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
$
|
4,079
|
|
|
$
|
2,003
|
|
|
$
|
3,212
|
|
|
$
|
390
|
|
|
$
|
369
|
|
|
$
|
144
|
|
|
$
|
165
|
|
|
$
|
10,362
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
Recoveries
|
|
|
-
|
|
|
|
2
|
|
|
|
20
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
Provisions (credits)
|
|
|
607
|
|
|
|
130
|
|
|
|
(861
|
)
|
|
|
(53
|
)
|
|
|
(138
|
)
|
|
|
(82
|
)
|
|
|
97
|
|
|
|
(300
|
)
|
September 30, 2021
|
|
$
|
4,686
|
|
|
$
|
2,135
|
|
|
$
|
2,368
|
|
|
$
|
335
|
|
|
$
|
231
|
|
|
$
|
62
|
|
|
$
|
262
|
|
|
$
|
10,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
$
|
4,274
|
|
|
$
|
1,910
|
|
|
$
|
3,526
|
|
|
$
|
534
|
|
|
$
|
666
|
|
|
$
|
149
|
|
|
$
|
89
|
|
|
$
|
11,148
|
|
Charge-offs
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
(34
|
)
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(75
|
)
|
Recoveries
|
|
|
-
|
|
|
|
1
|
|
|
|
11
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
Provisions (credits)
|
|
|
158
|
|
|
|
(374
|
)
|
|
|
(33
|
)
|
|
|
11
|
|
|
|
152
|
|
|
|
40
|
|
|
|
131
|
|
|
|
85
|
|
September 30, 2020
|
|
$
|
4,397
|
|
|
$
|
1,537
|
|
|
$
|
3,470
|
|
|
$
|
540
|
|
|
$
|
818
|
|
|
$
|
189
|
|
|
$
|
220
|
|
|
$
|
11,171
|
|
(In thousands)
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Commercial
and
Industrial
|
|
|
Consumer
and
Other
|
|
|
Construction
|
|
|
Construction
to
Permanent
- CRE
|
|
|
Unallocated
|
|
|
Total
|
|
Nine months ended September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
$
|
4,485
|
|
|
$
|
1,379
|
|
|
$
|
3,284
|
|
|
$
|
295
|
|
|
$
|
739
|
|
|
$
|
162
|
|
|
$
|
240
|
|
|
$
|
10,584
|
|
Charge-offs
|
|
|
(51
|
)
|
|
|
(3
|
)
|
|
|
(212
|
)
|
|
|
(23
|
)
|
|
|
(69
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(358
|
)
|
Recoveries
|
|
|
-
|
|
|
|
2
|
|
|
|
44
|
|
|
|
107
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153
|
|
Provisions (credits)
|
|
|
252
|
|
|
|
757
|
|
|
|
(748
|
)
|
|
|
(44
|
)
|
|
|
(439
|
)
|
|
|
(100
|
)
|
|
|
22
|
|
|
|
(300
|
)
|
September 30, 2021
|
|
$
|
4,686
|
|
|
$
|
2,135
|
|
|
$
|
2,368
|
|
|
$
|
335
|
|
|
$
|
231
|
|
|
$
|
62
|
|
|
$
|
262
|
|
|
$
|
10,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
3,789
|
|
|
$
|
1,038
|
|
|
$
|
4,340
|
|
|
$
|
341
|
|
|
$
|
477
|
|
|
$
|
130
|
|
|
$
|
-
|
|
|
$
|
10,115
|
|
Charge-offs
|
|
|
(400
|
)
|
|
|
(13
|
)
|
|
|
(352
|
)
|
|
|
(45
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(810
|
)
|
Recoveries
|
|
|
-
|
|
|
|
1
|
|
|
|
62
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67
|
|
Provisions (credits)
|
|
|
1,008
|
|
|
|
511
|
|
|
|
(580
|
)
|
|
|
240
|
|
|
|
341
|
|
|
|
59
|
|
|
|
220
|
|
|
|
1,799
|
|
September 30, 2020
|
|
$
|
4,397
|
|
|
$
|
1,537
|
|
|
$
|
3,470
|
|
|
$
|
540
|
|
|
$
|
818
|
|
|
$
|
189
|
|
|
$
|
220
|
|
|
$
|
11,171
|
|
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 September 30, 2021 and December 31, 2020:
(In thousands)
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Commercial
and
Industrial
|
|
|
Consumer
and
Other
|
|
|
Construction
|
|
|
Construction
to
Permanent
- CRE
|
|
|
Unallocated
|
|
|
Total
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,178
|
|
|
$
|
4
|
|
|
$
|
638
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,820
|
|
Collectively evaluated for impairment
|
|
|
3,508
|
|
|
|
2,131
|
|
|
|
1,730
|
|
|
|
335
|
|
|
|
231
|
|
|
|
62
|
|
|
|
262
|
|
|
|
8,259
|
|
Total allowance for loan and lease losses
|
|
$
|
4,686
|
|
|
$
|
2,135
|
|
|
$
|
2,368
|
|
|
$
|
335
|
|
|
$
|
231
|
|
|
$
|
62
|
|
|
$
|
262
|
|
|
$
|
10,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, gross:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
19,223
|
|
|
$
|
4,329
|
|
|
$
|
4,084
|
|
|
$
|
525
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28,161
|
|
Collectively evaluated for impairment
|
|
|
296,630
|
|
|
|
167,471
|
|
|
|
115,604
|
|
|
|
53,151
|
|
|
|
41,609
|
|
|
|
11,912
|
|
|
|
-
|
|
|
|
686,377
|
|
Total loans receivable, gross
|
|
$
|
315,853
|
|
|
$
|
171,800
|
|
|
$
|
119,688
|
|
|
$
|
53,676
|
|
|
$
|
41,609
|
|
|
$
|
11,912
|
|
|
$
|
-
|
|
|
$
|
714,538
|
|
(In thousands)
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Commercial
and
Industrial
|
|
|
Consumer
and
Other
|
|
|
Construction
|
|
|
Construction
to
Permanent
- CRE
|
|
|
Unallocated
|
|
|
Total
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,398
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,412
|
|
Collectively evaluated for impairment
|
|
|
3,087
|
|
|
|
1,375
|
|
|
|
3,284
|
|
|
|
285
|
|
|
|
739
|
|
|
|
162
|
|
|
|
240
|
|
|
|
9,172
|
|
Total allowance for loan losses
|
|
$
|
4,485
|
|
|
$
|
1,379
|
|
|
$
|
3,284
|
|
|
$
|
295
|
|
|
$
|
739
|
|
|
$
|
162
|
|
|
$
|
240
|
|
|
$
|
10,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, gross:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
14,534
|
|
|
$
|
3,962
|
|
|
$
|
4,700
|
|
|
$
|
1,187
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,383
|
|
Collectively evaluated for impairment
|
|
|
267,844
|
|
|
|
149,889
|
|
|
|
139,597
|
|
|
|
66,448
|
|
|
|
66,984
|
|
|
|
15,035
|
|
|
|
-
|
|
|
|
705,797
|
|
Total loans receivable, gross
|
|
$
|
282,378
|
|
|
$
|
153,851
|
|
|
$
|
144,297
|
|
|
$
|
67,635
|
|
|
$
|
66,984
|
|
|
$
|
15,035
|
|
|
$
|
-
|
|
|
$
|
730,180
|
|
20
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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 no less than bi-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.
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.
21
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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 nine months of 2021.
22
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 September 30, 2021.
(In thousands)
|
|
Performing (Accruing) Loans
|
|
|
|
|
|
|
|
|
|
As of September 30, 2021:
|
|
30 - 59 Days
Past Due
|
|
|
60 - 89 Days
Past Due
|
|
|
90 Days
or
Greater Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Performing
Loans
|
|
|
Non-accruing
Loans
|
|
|
Loans
Receivable
Gross
|
|
Loan portfolio segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
428
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
428
|
|
|
$
|
268,177
|
|
|
$
|
268,605
|
|
|
$
|
-
|
|
|
$
|
268,605
|
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,751
|
|
|
|
16,751
|
|
|
|
-
|
|
|
|
16,751
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,274
|
|
|
|
11,274
|
|
|
|
19,223
|
|
|
|
30,497
|
|
|
|
|
428
|
|
|
|
-
|
|
|
|
-
|
|
|
|
428
|
|
|
|
296,202
|
|
|
|
296,630
|
|
|
|
19,223
|
|
|
|
315,853
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
50
|
|
|
$
|
163,501
|
|
|
|
163,551
|
|
|
|
-
|
|
|
|
163,551
|
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,776
|
|
|
|
3,776
|
|
|
|
-
|
|
|
|
3,776
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,473
|
|
|
|
4,473
|
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
167,277
|
|
|
|
167,327
|
|
|
|
4,473
|
|
|
|
171,800
|
|
Commercial and Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
900
|
|
|
$
|
582
|
|
|
$
|
-
|
|
|
|
1,482
|
|
|
$
|
110,409
|
|
|
|
111,891
|
|
|
|
-
|
|
|
|
111,891
|
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,414
|
|
|
|
1,414
|
|
|
|
-
|
|
|
|
1,414
|
|
Substandard
|
|
|
657
|
|
|
|
688
|
|
|
|
-
|
|
|
|
1,345
|
|
|
|
834
|
|
|
|
2,179
|
|
|
|
4,204
|
|
|
|
6,383
|
|
|
|
|
1,557
|
|
|
|
1,270
|
|
|
|
-
|
|
|
|
2,827
|
|
|
|
112,657
|
|
|
|
115,484
|
|
|
|
4,204
|
|
|
|
119,688
|
|
Consumer and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
18
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
|
20
|
|
|
$
|
53,487
|
|
|
|
53,507
|
|
|
|
-
|
|
|
|
53,507
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
23
|
|
|
|
146
|
|
|
|
169
|
|
|
|
|
18
|
|
|
|
2
|
|
|
|
-
|
|
|
|
20
|
|
|
|
53,510
|
|
|
|
53,530
|
|
|
|
146
|
|
|
|
53,676
|
|
Construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
41,609
|
|
|
|
41,609
|
|
|
|
-
|
|
|
|
41,609
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,609
|
|
|
|
41,609
|
|
|
|
-
|
|
|
|
41,609
|
|
Construction to Permanent - CRE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
604
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
604
|
|
|
$
|
11,308
|
|
|
|
11,912
|
|
|
|
-
|
|
|
|
11,912
|
|
|
|
|
604
|
|
|
|
-
|
|
|
|
-
|
|
|
|
604
|
|
|
|
11,308
|
|
|
|
11,912
|
|
|
|
-
|
|
|
|
11,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,657
|
|
|
$
|
1,272
|
|
|
$
|
-
|
|
|
$
|
3,929
|
|
|
$
|
682,563
|
|
|
$
|
686,492
|
|
|
$
|
28,046
|
|
|
$
|
714,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, gross:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
2,000
|
|
|
$
|
584
|
|
|
$
|
-
|
|
|
$
|
2,584
|
|
|
$
|
648,491
|
|
|
$
|
651,075
|
|
|
$
|
-
|
|
|
$
|
651,075
|
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,941
|
|
|
|
21,941
|
|
|
|
-
|
|
|
|
21,941
|
|
Substandard
|
|
|
657
|
|
|
|
688
|
|
|
|
-
|
|
|
|
1,345
|
|
|
|
12,131
|
|
|
|
13,476
|
|
|
|
28,046
|
|
|
|
41,522
|
|
Loans receivable, gross
|
|
$
|
2,657
|
|
|
$
|
1,272
|
|
|
$
|
-
|
|
|
$
|
3,929
|
|
|
$
|
682,563
|
|
|
$
|
686,492
|
|
|
$
|
28,046
|
|
|
$
|
714,538
|
|
23
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.
(In thousands)
|
|
Performing (Accruing) Loans
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020:
|
|
30 - 59 Days
Past Due
|
|
|
60 - 89 Days
Past Due
|
|
|
90 Days
or
Greater Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Performing
Loans
|
|
|
Non-accruing
Loans
|
|
|
Loans
Receivable
Gross
|
|
Loan portfolio segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
230,824
|
|
|
$
|
230,824
|
|
|
$
|
-
|
|
|
$
|
230,824
|
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,658
|
|
|
|
25,658
|
|
|
|
-
|
|
|
|
25,658
|
|
Substandard
|
|
|
354
|
|
|
|
-
|
|
|
|
9
|
|
|
|
363
|
|
|
|
10,999
|
|
|
|
11,362
|
|
|
|
14,534
|
|
|
|
25,896
|
|
|
|
|
354
|
|
|
|
-
|
|
|
|
9
|
|
|
|
363
|
|
|
|
267,481
|
|
|
|
267,844
|
|
|
|
14,534
|
|
|
|
282,378
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
478
|
|
|
|
361
|
|
|
|
-
|
|
|
|
839
|
|
|
|
145,298
|
|
|
|
146,137
|
|
|
|
-
|
|
|
|
146,137
|
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,860
|
|
|
|
3,860
|
|
|
|
-
|
|
|
|
3,860
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,854
|
|
|
|
3,854
|
|
|
|
|
478
|
|
|
|
361
|
|
|
|
-
|
|
|
|
839
|
|
|
|
149,158
|
|
|
|
149,997
|
|
|
|
3,854
|
|
|
|
153,851
|
|
Commercial and Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
-
|
|
|
|
209
|
|
|
|
-
|
|
|
|
209
|
|
|
|
102,131
|
|
|
|
102,340
|
|
|
|
-
|
|
|
|
102,340
|
|
Special mention
|
|
|
-
|
|
|
|
4,000
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
8,881
|
|
|
|
12,881
|
|
|
|
-
|
|
|
|
12,881
|
|
Substandard
|
|
|
603
|
|
|
|
113
|
|
|
|
-
|
|
|
|
716
|
|
|
|
27,660
|
|
|
|
28,376
|
|
|
|
700
|
|
|
|
29,076
|
|
|
|
|
603
|
|
|
|
4,322
|
|
|
|
-
|
|
|
|
4,925
|
|
|
|
138,672
|
|
|
|
143,597
|
|
|
|
700
|
|
|
|
144,297
|
|
Consumer and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
1
|
|
|
|
-
|
|
|
|
7
|
|
|
|
8
|
|
|
|
66,589
|
|
|
|
66,597
|
|
|
|
-
|
|
|
|
66,597
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
121
|
|
|
|
121
|
|
|
|
917
|
|
|
|
1,038
|
|
|
|
|
1
|
|
|
|
-
|
|
|
|
7
|
|
|
|
8
|
|
|
|
66,710
|
|
|
|
66,718
|
|
|
|
917
|
|
|
|
67,635
|
|
Construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
-
|
|
|
|
2,351
|
|
|
|
-
|
|
|
|
2,351
|
|
|
|
64,633
|
|
|
|
66,984
|
|
|
|
-
|
|
|
|
66,984
|
|
|
|
|
-
|
|
|
|
2,351
|
|
|
|
-
|
|
|
|
2,351
|
|
|
|
64,633
|
|
|
|
66,984
|
|
|
|
-
|
|
|
|
66,984
|
|
Construction to Permanent - CRE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,035
|
|
|
|
15,035
|
|
|
|
-
|
|
|
|
15,035
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,035
|
|
|
|
15,035
|
|
|
|
-
|
|
|
|
15,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,436
|
|
|
$
|
7,034
|
|
|
$
|
16
|
|
|
$
|
8,486
|
|
|
$
|
701,689
|
|
|
$
|
710,175
|
|
|
$
|
20,005
|
|
|
$
|
730,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, gross:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
479
|
|
|
$
|
2,921
|
|
|
$
|
7
|
|
|
$
|
3,407
|
|
|
$
|
624,510
|
|
|
$
|
627,917
|
|
|
$
|
-
|
|
|
$
|
627,917
|
|
Special mention
|
|
|
-
|
|
|
|
4,000
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
38,399
|
|
|
|
42,399
|
|
|
|
-
|
|
|
|
42,399
|
|
Substandard
|
|
|
957
|
|
|
|
113
|
|
|
|
9
|
|
|
|
1,079
|
|
|
|
38,780
|
|
|
|
39,859
|
|
|
|
20,005
|
|
|
|
59,864
|
|
Loans receivable, gross
|
|
$
|
1,436
|
|
|
$
|
7,034
|
|
|
$
|
16
|
|
|
$
|
8,486
|
|
|
$
|
701,689
|
|
|
$
|
710,175
|
|
|
$
|
20,005
|
|
|
$
|
730,180
|
|
24
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 September 30, 2021 and December 31, 2020:
(In thousands)
|
|
Non-accruing Loans
|
|
|
|
|
|
|
|
30 - 59
Days
Past Due
|
|
|
60 - 89
Days
Past Due
|
|
|
90 Days or
Greater Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Non-accruing
Loans
|
|
As of September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portfolio segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
$
|
-
|
|
|
$
|
8,950
|
|
|
$
|
6,831
|
|
|
$
|
15,781
|
|
|
$
|
3,442
|
|
|
$
|
19,223
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
2,320
|
|
|
|
2,320
|
|
|
|
2,153
|
|
|
|
4,473
|
|
Commercial and Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
|
497
|
|
|
|
-
|
|
|
|
2,478
|
|
|
|
2,975
|
|
|
|
1,229
|
|
|
|
4,204
|
|
Consumer and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
|
-
|
|
|
|
96
|
|
|
|
29
|
|
|
|
125
|
|
|
|
21
|
|
|
|
146
|
|
Total non-accruing loans
|
|
$
|
497
|
|
|
$
|
9,046
|
|
|
$
|
11,658
|
|
|
$
|
21,201
|
|
|
$
|
6,845
|
|
|
$
|
28,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portfolio segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,723
|
|
|
$
|
5,723
|
|
|
$
|
8,811
|
|
|
$
|
14,534
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
2,884
|
|
|
|
2,884
|
|
|
|
970
|
|
|
|
3,854
|
|
Commercial and Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
700
|
|
|
|
700
|
|
|
|
-
|
|
|
|
700
|
|
Consumer and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
|
22
|
|
|
|
-
|
|
|
|
91
|
|
|
|
113
|
|
|
|
804
|
|
|
|
917
|
|
Total non-accruing loans
|
|
$
|
22
|
|
|
$
|
-
|
|
|
$
|
9,398
|
|
|
$
|
9,420
|
|
|
$
|
10,585
|
|
|
$
|
20,005
|
|
If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $230,000 and $689,000 would have been recognized during the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2020, additional interest income (net of cash collected) of approximately $216,000 and $691,000 would have been recognized, respectively.
Interest income collected and recognized on non-accruing loans for the three and nine months ended September 30, 2021 and 2020 was $174,000 and $313,000, respectively. During the three and nine months ended September 30, 2020, interest income collected and recognized on non-accruing loans was $21,000 and $106,000, 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.
25
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 September 30, 2021 and December 31, 2020:
(In thousands)
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Loan portfolio segment:
|
|
Number of
Loans
|
|
|
Recorded
Investment
|
|
|
Number of
Loans
|
|
|
Recorded
Investment
|
|
Commercial Real Estate
|
|
|
1
|
|
|
$
|
8,950
|
|
|
|
2
|
|
|
$
|
9,884
|
|
Residential Real Estate
|
|
|
3
|
|
|
|
883
|
|
|
|
3
|
|
|
|
928
|
|
Commercial and Industrial
|
|
|
0
|
|
|
|
-
|
|
|
|
1
|
|
|
|
4,000
|
|
Consumer and Other
|
|
|
3
|
|
|
|
644
|
|
|
|
5
|
|
|
|
1,074
|
|
Total TDR Loans
|
|
|
7
|
|
|
|
10,477
|
|
|
|
11
|
|
|
|
15,886
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDRs included in non-accrual loans
|
|
|
3
|
|
|
|
(9,769
|
)
|
|
|
6
|
|
|
|
(11,508
|
)
|
Total accrual TDR Loans
|
|
|
4
|
|
|
$
|
708
|
|
|
|
5
|
|
|
$
|
4,378
|
|
During the three and nine months ended September 30, 2021, no loans were modified as TDRs.
No loans were modified as TDR for the three-month period ended September 30, 2020. The following loans were modified as TDRs during the nine months ended September 30, 2020:
(In thousands)
|
|
|
|
|
|
Outstanding Recorded Investment
|
|
Nine Months Ended September 30, 2020
|
|
Number of Loans
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
Loan portfolio segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
1
|
|
|
$
|
57
|
|
|
$
|
56
|
|
Consumer and Other
|
|
|
2
|
|
|
|
121
|
|
|
|
121
|
|
Total TDR Loans
|
|
|
3
|
|
|
$
|
178
|
|
|
$
|
177
|
|
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 and nine months ended September 30, 2021 and 2020. At September 30, 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.
26
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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, 2019. In addition, on April 7, 2020, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs. The Bank had modified $232.7 million of loans to borrowers to defer the payment of interest and/or principal for up to 180 days. The vast majority all of those loans deferred have now resumed normal payments. Approximately fourteen loans with balances totaling $6.8 million have not been provided addition deferrals and are now delinquent on payment. Only three loans remaining on deferral totaled $7.3 million at September 30, 2021. According to regulatory guidance and CARES Act, these modified loans were not TDRs as of September 30, 2021.
Impaired Loans
The following table reflects information about the impaired loans by class as of September 30, 2021 and December 31, 2020:
(In thousands)
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Recorded
Investment
|
|
|
Principal
Outstanding
|
|
|
Related
Allowance
|
|
|
Recorded
Investment
|
|
|
Principal
Outstanding
|
|
|
Related
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
10,273
|
|
|
$
|
11,306
|
|
|
$
|
-
|
|
|
$
|
5,723
|
|
|
$
|
6,644
|
|
|
$
|
-
|
|
Residential Real Estate
|
|
|
4,221
|
|
|
|
4,179
|
|
|
|
-
|
|
|
|
3,853
|
|
|
|
3,900
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
648
|
|
|
|
772
|
|
|
|
-
|
|
|
|
4,700
|
|
|
|
4,816
|
|
|
|
-
|
|
Consumer and Other
|
|
|
525
|
|
|
|
525
|
|
|
|
-
|
|
|
|
1,177
|
|
|
|
1,332
|
|
|
|
-
|
|
|
|
|
15,667
|
|
|
|
16,782
|
|
|
|
-
|
|
|
|
15,453
|
|
|
|
16,692
|
|
|
|
-
|
|
With a related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
8,950
|
|
|
$
|
8,811
|
|
|
$
|
1,178
|
|
|
|
8,811
|
|
|
|
8,811
|
|
|
|
1,398
|
|
Residential Real Estate
|
|
|
412
|
|
|
|
436
|
|
|
|
8
|
|
|
|
109
|
|
|
|
109
|
|
|
|
4
|
|
Commercial and Industrial
|
|
|
3,556
|
|
|
|
4,040
|
|
|
|
640
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Other
|
|
|
171
|
|
|
|
203
|
|
|
|
2
|
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
13,089
|
|
|
|
13,490
|
|
|
|
1,828
|
|
|
|
8,930
|
|
|
|
8,930
|
|
|
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans, Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
19,223
|
|
|
|
20,117
|
|
|
|
1,178
|
|
|
|
14,534
|
|
|
|
15,455
|
|
|
|
1,398
|
|
Residential Real Estate
|
|
|
4,633
|
|
|
|
4,615
|
|
|
|
8
|
|
|
|
3,962
|
|
|
|
4,009
|
|
|
|
4
|
|
Commercial and Industrial
|
|
|
4,204
|
|
|
|
4,812
|
|
|
|
640
|
|
|
|
4,700
|
|
|
|
4,816
|
|
|
|
-
|
|
Consumer and Other
|
|
|
696
|
|
|
|
728
|
|
|
|
2
|
|
|
|
1,187
|
|
|
|
1,342
|
|
|
|
10
|
|
Impaired Loans, Total
|
|
$
|
28,756
|
|
|
$
|
30,272
|
|
|
$
|
1,828
|
|
|
$
|
24,383
|
|
|
$
|
25,622
|
|
|
$
|
1,412
|
|
27
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The following tables summarize additional information regarding impaired loans by class for the three and nine months ended September 30, 2021 and 2020.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
8,671
|
|
|
$
|
95
|
|
|
$
|
6,975
|
|
|
$
|
13
|
|
|
$
|
7,538
|
|
|
$
|
133
|
|
|
$
|
5,702
|
|
|
$
|
39
|
|
Residential Real Estate
|
|
|
3,752
|
|
|
|
15
|
|
|
|
3,641
|
|
|
|
12
|
|
|
|
4,088
|
|
|
|
45
|
|
|
|
3,603
|
|
|
|
45
|
|
Commercial and Industrial
|
|
|
2,657
|
|
|
|
4
|
|
|
|
1,716
|
|
|
|
2
|
|
|
|
3,122
|
|
|
|
9
|
|
|
|
1,936
|
|
|
|
4
|
|
Consumer and Other
|
|
|
526
|
|
|
|
4
|
|
|
|
1,321
|
|
|
|
10
|
|
|
|
755
|
|
|
|
10
|
|
|
|
1,101
|
|
|
|
26
|
|
|
|
|
15,606
|
|
|
|
118
|
|
|
|
13,653
|
|
|
|
37
|
|
|
|
15,503
|
|
|
|
197
|
|
|
|
12,342
|
|
|
|
114
|
|
With a related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
8,916
|
|
|
|
-
|
|
|
|
8,975
|
|
|
|
-
|
|
|
|
8,854
|
|
|
|
-
|
|
|
|
8,876
|
|
|
|
35
|
|
Residential Real Estate
|
|
|
824
|
|
|
|
7
|
|
|
|
55
|
|
|
|
1
|
|
|
|
427
|
|
|
|
14
|
|
|
|
33
|
|
|
|
4
|
|
Commercial and Industrial
|
|
|
3,231
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,856
|
|
|
|
113
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Other
|
|
|
169
|
|
|
|
1
|
|
|
|
74
|
|
|
|
1
|
|
|
|
87
|
|
|
|
5
|
|
|
|
50
|
|
|
|
4
|
|
|
|
|
13,140
|
|
|
|
63
|
|
|
|
9,104
|
|
|
|
2
|
|
|
|
11,224
|
|
|
|
132
|
|
|
|
8,959
|
|
|
|
43
|
|
Impaired Loans, Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
17,587
|
|
|
|
95
|
|
|
|
15,950
|
|
|
|
13
|
|
|
|
16,392
|
|
|
|
133
|
|
|
|
14,578
|
|
|
|
74
|
|
Residential Real Estate
|
|
|
4,576
|
|
|
|
22
|
|
|
|
3,696
|
|
|
|
13
|
|
|
|
4,515
|
|
|
|
59
|
|
|
|
3,636
|
|
|
|
49
|
|
Commercial and Industrial
|
|
|
5,888
|
|
|
|
59
|
|
|
|
1,716
|
|
|
|
2
|
|
|
|
4,978
|
|
|
|
122
|
|
|
|
1,936
|
|
|
|
4
|
|
Consumer and Other
|
|
|
695
|
|
|
|
5
|
|
|
|
1,395
|
|
|
|
11
|
|
|
|
842
|
|
|
|
15
|
|
|
|
1,151
|
|
|
|
30
|
|
Impaired Loans, Total
|
|
$
|
28,746
|
|
|
$
|
181
|
|
|
$
|
22,757
|
|
|
$
|
39
|
|
|
$
|
26,727
|
|
|
$
|
329
|
|
|
$
|
21,301
|
|
|
$
|
157
|
|
Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs. As of September 30, 2021, based on the ongoing monitoring and analysis of the loan portfolio, thirty-six loans were identified as impaired, with a total recorded balance of $28.8 million for which $1.8 million specific reserves were established. Twenty-five out of thirty-six impaired loans were individually evaluated for impairment, and the remaining eleven 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.
28
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 5.
|
Loans Held for Sale
|
Loans held for sale represent the guaranteed portion of SBA loans originated and are reflected at the lower of aggregate cost or market value. As of September 30, 2021, SBA loans held for sale, consisted of $2.9 million SBA commercial real estate loans and $1.2 million SBA commercial and industrial loans, respectively. As of December 31, 2020, SBA loans held for sale only consisted of $1.2 million of SBA commercial and industrial loans. During the nine months ended September 30, 2021, $281,000 SBA loans previously classified as held for sale were transferred to held for investment.
The Company generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the unguaranteed portion in its portfolio. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets, less the discount of the retained portion of the loan are recognized in income.
Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment will be evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.
Serviced loans sold to others are not included in the accompanying consolidated balance sheets. The total amount of such loans serviced, but owned by third party, amounted to approximately $18.8 million and $19.4 million at September 30, 2021 and December 31, 2020, respectively. The servicing asset has a carrying value of $375,000 and fair value of $351,000 at September 30, 2021. Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets. The servicing asset is included in other assets on the consolidated balance sheets.
The following table presents an analysis of the activity in the SBA servicing assets for the three and nine months ended September 30, 2021 and 2020:
(In thousands)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Beginning balance
|
|
$
|
380
|
|
|
$
|
221
|
|
|
$
|
316
|
|
|
$
|
201
|
|
Servicing rights capitalized
|
|
|
-
|
|
|
|
86
|
|
|
|
74
|
|
|
|
115
|
|
Servicing rights amortized
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
(15
|
)
|
|
|
(15
|
)
|
Ending balance
|
|
$
|
375
|
|
|
$
|
301
|
|
|
$
|
375
|
|
|
$
|
301
|
|
Note 6.
|
Goodwill and Other Intangible Assets
|
On May 10, 2018 the Company completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT. The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut.
The assets acquired and liabilities assumed from Prime Bank were recorded at their fair value as of the closing date of the acquisition. Goodwill of $2.1 million was recorded at the time of the acquisition, and was adjusted to $1.7 million as of December 31, 2018, primarily due to updating of fair value of the core deposit intangible and adjustment of cash and contingent consideration. The goodwill was further adjusted to $1.1 million as a result of reducing the estimated amount to be paid pursuant to certain problem loans pending resolution by $621,000 as of May 10, 2019. As of December 31, 2020, a purchase price adjustment of $556,000 was recognized to project expenses on the consolidated statements of operations. The charge represented an adjustment to the earlier estimate of the final purchase price upon preliminary settlement of the litigation related to a dispute over the final purchase price in 2020. The goodwill is all deductible for income taxes over 15 years.
29
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Goodwill is evaluated for impairment annually, in the fourth quarter of the year, or whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities, and acts by governments and courts.
The Company did not perform an interim goodwill test in the first three quarters of 2021 as no events occurred which would trigger an impairment assessment.
The following table presents the balance of deposits held, by category as of September 30, 2021 and December 31, 2020.
(In thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Non-interest bearing
|
|
$
|
207,941
|
|
|
$
|
158,676
|
|
Interest bearing:
|
|
|
|
|
|
|
|
|
Negotiable order of withdrawal
|
|
|
34,528
|
|
|
|
30,529
|
|
Savings
|
|
|
102,365
|
|
|
|
98,635
|
|
Money market
|
|
|
165,671
|
|
|
|
146,389
|
|
Certificates of deposit, less than $250,000
|
|
|
142,141
|
|
|
|
160,968
|
|
Certificates of deposit, $250,000 or greater
|
|
|
54,991
|
|
|
|
49,172
|
|
Brokered deposits
|
|
|
27,036
|
|
|
|
41,287
|
|
Interest bearing, Total
|
|
|
526,732
|
|
|
|
526,980
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
734,673
|
|
|
$
|
685,656
|
|
On July 22, 2020, the Company completed the purchase of prepaid debit card deposits of $50.0 million from a prominent national provider and processor of prepaid debit cards for corporate, consumer and government clients. The prepaid debit card deposits are included in the non-interest-bearing deposits and money market deposits, which totaled approximately $142.4 million and $74.3 million as of September 30, 2021 and December 31, 2020, respectively.
As of September 30, 2021, contractual maturities of Certificates of Deposit (“CDs”), and brokered deposits is summarized as follows:
(In thousands)
|
|
CDs
less than
$250,000
|
|
|
CDs
$250,000
or greater
|
|
|
Brokered
Deposits
|
|
|
Total
|
|
1 year or less
|
|
$
|
110,228
|
|
|
$
|
29,570
|
|
|
$
|
24,544
|
|
|
$
|
164,342
|
|
More than 1 year through 2 years
|
|
|
22,264
|
|
|
|
24,898
|
|
|
|
1,495
|
|
|
|
48,657
|
|
More than 2 years through 3 years
|
|
|
1,375
|
|
|
|
-
|
|
|
|
748
|
|
|
|
2,123
|
|
More than 3 years through 4 years
|
|
|
2,608
|
|
|
|
523
|
|
|
|
249
|
|
|
|
3,380
|
|
More than 4 years through 5 years
|
|
|
5,666
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,666
|
|
|
|
$
|
142,141
|
|
|
$
|
54,991
|
|
|
$
|
27,036
|
|
|
$
|
224,168
|
|
30
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Derivatives Not Designated in Hedge Relationships
Patriot is a party to four interest rate swaps derivatives that are not designated as hedging instruments. Under a program, Patriot will execute interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Patriot executes with a third party, such that Patriot minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties.
Patriot entered two initial interest rate swaps under the program in November 2018, and another two swaps were entered into in May 2019. As of September 30, 2021 and December 31, 2020, Patriot had cash pledged for collateral on its interest rate swaps of $1.4 million and $1.4 million, respectively. This collateral is included in other assets on the consolidated balance sheets.
The company did not recognize any net gain or loss in other noninterest income on the consolidated statements of operations during the three and nine months ended September 30, 2021 and 2020.
Derivatives Designated in Hedge Relationships
Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. In April 2021, Patriot entered into an interest rate swap, which was designated as a cash flow hedge that effectively converted variable-rate receivable into fixed-rate receivable. The Company’s objectives in using the cash flow hedge are to add stability to interest receivable and to manage its exposure to contractually specified interest rate movements. Under the term of the swap contract, the Company hedged the cashflows associated with a pool of 1-month LIBOR floating rate loans by converting a $50 million portion of that pool of loans into fixed rates with the swap. The Bank received fixed and paid floating rate based on 1 month LIBOR for a 7-year rolling period beginning April 29, 2021. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk. Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
In August 2021, the cash flow hedge interest rate swap contract was terminated. During the three and nine month ended September 30, 2021, the Company recognized $64,000 and $149,000 of accumulated other comprehensive income that was reclassified into interest income, respectively. The swap interest income is included in interest and fees on loans on the consolidated statements of operations. In addition, a gain of $512,000 was recognized from the termination of the interest rate swap cash flow hedge for the three and nine months ended September 30, 2021, which is included in other income on the consolidated statements of operations.
The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.
Further discussion of the accounting policy of derivatives is set forth in Note 1, and information about the valuation methods used to measure the fair value of derivatives is provided in Note 13 to the consolidated financial statements.
31
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The following table presents summary information regarding these derivatives for the periods presented (dollars in thousands):
(In thousands)
|
|
Notional Amount
|
|
|
Maturity (Years)
|
|
|
Fixed Rate
|
|
Variable
Rate
|
|
Fair Value
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified in Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer interest rate swap
|
|
$
|
4,869
|
|
|
|
7.6
|
|
|
|
5.25
|
%
|
1 Mo. LIBOR + 1.96%
|
|
$
|
702
|
|
Customer interest rate swap
|
|
|
1,406
|
|
|
|
7.8
|
|
|
|
4.38
|
%
|
1 Mo. LIBOR + 2.00%
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified in Other Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3rd party interest rate swap
|
|
$
|
4,869
|
|
|
|
7.6
|
|
|
|
5.25
|
%
|
1 Mo. LIBOR + 1.96%
|
|
$
|
(702
|
)
|
3rd party interest rate swap
|
|
|
1,406
|
|
|
|
7.8
|
|
|
|
4.38
|
%
|
1 Mo. LIBOR + 2.00%
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified in Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer interest rate swap
|
|
$
|
4,911
|
|
|
|
8.3
|
|
|
|
5.25
|
%
|
1 Mo. LIBOR + 1.96%
|
|
$
|
997
|
|
Customer interest rate swap
|
|
|
1,431
|
|
|
|
8.5
|
|
|
|
4.38
|
%
|
1 Mo. LIBOR + 2.00%
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified in Other Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3rd party interest rate swap
|
|
$
|
4,911
|
|
|
|
8.3
|
|
|
|
5.25
|
%
|
1 Mo. LIBOR + 1.96%
|
|
$
|
(997
|
)
|
3rd party interest rate swap
|
|
|
1,431
|
|
|
|
8.5
|
|
|
|
4.38
|
%
|
1 Mo. LIBOR + 2.00%
|
|
|
(190
|
)
|
Changes in the consolidated statements of comprehensive income related to interest rate derivatives designated as hedges of cash flows were as follows for the three and nine months ended September 30, 2021:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In thousands)
|
|
September 30, 2021
|
|
|
September 30, 2021
|
|
Interest rate swap designated as cash flow hedge:
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain recognized in accumulated other comprehensive income before reclassifications
|
|
$
|
(104
|
)
|
|
$
|
149
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(64
|
)
|
|
|
(149
|
)
|
Income tax effect on items recognized in accumulated other comprehensive income
|
|
|
44
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
(124
|
)
|
|
$
|
-
|
|
The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates. Generally, lower long-term interest rates will result in a positive impact to comprehensive income whereas higher long-term interest rates will result in a negative impact to comprehensive income.
32
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 9.
|
Share-Based Compensation and Employee Benefit Plan
|
In 2011, the Company adopted the Patriot National Bancorp, Inc. 2012 Stock Plan (the “2012 Plan”). The 2012 Plan was amended in 2020 and renamed as the Patriot National Bancorp, Inc. 2020 Stock Plan (the “2020 Plan”). A copy of the 2020 Plan was filed as Exhibit 10.1 to the Company’s Amendment No. 1 on Form 10-K/A filed on April 30, 2021. The 2020 Plan provides an incentive to directors and employees of the Company by the grant of restricted stock awards (“RSA”).
The 2020 Plan authorizes 3,000,000 shares of the Company’s Common Stock for issuance. As of September 30, 2021, 2,834,617 shares of stock are available for issuance under the Plan. In accordance with the terms of the Plan, the vesting of RSAs and options may be accelerated at the discretion of the Compensation Committee of the Board of Directors. The Compensation Committee sets the terms and conditions applicable to the vesting of RSAs. RSAs granted to directors and employees generally vest in quarterly or annual installments over a three, four or five year period from the date of grant.
The following is a summary of the status of the Company’s restricted shares and changes for the three and nine months ended September 30, 2021 and 2020:
Three months ended September 30, 2021:
|
|
Number of
Shares Awarded
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Unvested at June 30, 2021
|
|
|
35,270
|
|
|
$
|
8.12
|
|
Vested
|
|
|
(700
|
)
|
|
$
|
17.85
|
|
Forfeited
|
|
|
(4,586
|
)
|
|
|
9.39
|
|
Unvested at September 30, 2021
|
|
|
29,984
|
|
|
$
|
7.69
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2020
|
|
|
18,498
|
|
|
$
|
7.29
|
|
Granted
|
|
|
20,476
|
|
|
$
|
10.48
|
|
Vested
|
|
|
(4,404
|
)
|
|
$
|
17.21
|
|
Forfeited
|
|
|
(4,586
|
)
|
|
$
|
9.39
|
|
Unvested at September 30, 2021
|
|
|
29,984
|
|
|
$
|
7.69
|
|
Three months ended September 30, 2020:
|
|
Number of
Shares Awarded
|
|
|
Weighted Average Grant Date
Fair Value
|
|
Unvested at June 30, 2020
|
|
|
26,597
|
|
|
$
|
8.89
|
|
Vested
|
|
|
(1,200
|
)
|
|
$
|
17.41
|
|
Unvested at September 30, 2020
|
|
|
25,397
|
|
|
$
|
8.49
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2019
|
|
|
21,470
|
|
|
$
|
12.91
|
|
Granted
|
|
|
12,484
|
|
|
$
|
6.12
|
|
Vested
|
|
|
(6,372
|
)
|
|
$
|
16.20
|
|
Forfeited
|
|
|
(2,185
|
)
|
|
$
|
15.92
|
|
Unvested at September 30, 2020
|
|
|
25,397
|
|
|
$
|
8.49
|
|
The Company recognizes compensation expense for all director and employee share-based compensation awards on a straight-line basis over the requisite service period, which is equal to the vesting schedule of each award, for each vesting portion of an award equal to its grant date fair value.
For the three and nine months ended September 30, 2021, the Company recognized total share-based compensation expense of $30,000 and $110,000, respectively. The share-based compensation attributable to employees of Patriot amounted to $25,000 and $65,000, respectively. Included in share-based compensation expense were $5,000 and $45,000 attributable to Patriot’s external directors, who received total compensation of $68,000 and $252,000 for each of those periods, respectively, which amounts are included in other operating expenses in the consolidated statements of operations.
For the three and nine months ended September 30, 2020, the Company recognized total share-based compensation expense of $42,000 and $123,000, respectively. The share-based compensation attributable to employees of Patriot amounted to $21,000 and $64,000, respectively. Included in share-based compensation expense were $21,000 and $59,000 attributable to Patriot’s external directors, who received total compensation of $87,000 and $342,000 for each of those periods, respectively, which amounts are included in other operating expenses in the consolidated statements of operations.
Unrecognized compensation expense attributable to the unvested restricted shares outstanding as of September 30, 2021 amounted to $244,000, which amount is expected to be recognized over the weighted average remaining life of the awards of 3.27 years.
Dividends
The Company has not paid any dividends since 2020 and has temporarily suspended dividend payments pending resolution of the economic uncertainties associated with the Coronavirus pandemic.
Retirement Plan
The Company offers a 401K retirement plan (the “401K”), which provides for tax-deferred salary deductions for eligible employees. Employees may choose to make voluntary contributions to the 401K, limited to an annual maximum amount as set forth periodically by the Internal Revenue Service. The Company matches 50% of such contributions, up to a maximum of nine percent of an employee's annual compensation. During the three and nine months ended September 30, 2021, compensation expense under the 401K aggregated $46,000 and $157,000, respectively. During the three and nine months ended September 30, 2020, compensation expense under the 401K aggregated $48,000 and $199,000, respectively.
34
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 10.
|
Earnings (loss) per share
|
The Company is required to present basic earnings (loss) per share and diluted earnings (loss) per share in its Consolidated Statements of Operations. Basic earnings (loss) per share amounts are computed by dividing net (loss) income by the weighted average number of common shares outstanding. Diluted earnings (loss) per share reflects additional common shares that would have been outstanding if potentially dilutive common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding unvested RSAs granted to directors and employees. The dilutive effect resulting from these potential shares is determined using the treasury stock method. The Company is also required to provide a reconciliation of the numerator and denominator used in the computation of both basic and diluted earnings (loss) per share.
The following table summarizes the computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2021 and 2020:
(Net income (loss) in thousands)
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
2021
|
|
|
2020
|
|
|
Basis earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Common shareholders
|
|
$
|
1,323
|
|
|
$
|
(87
|
)
|
|
|
$
|
3,199
|
|
|
$
|
(2,437
|
)
|
|
Divided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
3,947,284
|
|
|
|
3,935,898
|
|
|
|
|
3,945,816
|
|
|
|
3,934,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
0.34
|
|
|
$
|
(0.02
|
)
|
|
|
$
|
0.81
|
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Common shareholders
|
|
$
|
1,323
|
|
|
$
|
(87
|
)
|
|
|
$
|
3,199
|
|
|
$
|
(2,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
3,947,284
|
|
|
|
3,935,898
|
|
|
|
|
3,945,816
|
|
|
|
3,934,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of potentially dilutive restricted common shares
|
|
|
1,141
|
|
|
|
-
|
|
(1)
|
|
|
9,019
|
|
|
|
-
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
3,948,425
|
|
|
|
3,935,898
|
|
|
|
|
3,954,835
|
|
|
|
3,934,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
0.34
|
|
|
$
|
(0.02
|
)
|
|
|
$
|
0.81
|
|
|
$
|
(0.62
|
)
|
|
|
(1)
|
The weighted average diluted shares outstanding does not include 13,093 anti-dilutive restricted common shares for the three months ended September 30, 2020.
|
|
(2)
|
The weighted average diluted shares outstanding does not include 1,630 anti-dilutive restricted common shares for the nine months ended September 30, 2020.
|
35
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 11.
|
Financial Instruments with Off-Balance Sheet Risk
|
In the normal course of business, Patriot is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contractual amounts of these instruments reflect the extent of involvement Patriot has in particular classes of financial instruments.
The contractual amount of commitments to extend credit and standby letters of credit represents the maximum amount of potential accounting loss should: the contract be fully drawn upon; the customer default; and the value of any existing collateral become worthless. Patriot applies its credit policies to entering commitments and conditional obligations and, as with its lending activates, evaluates each customer’s creditworthiness on a case-by-case basis. Management believes that it effectively mitigates the credit risk of these financial instruments through its credit approval processes, establishing credit limits, monitoring the on-going creditworthiness of recipients and grantees, and the receipt of collateral as deemed necessary.
Financial instruments with credit risk at September 30, 2021 and December 31, 2020 are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2021
|
|
|
2020
|
|
Commitments to extend credit:
|
|
|
|
|
|
|
|
|
Unused lines of credit
|
|
$
|
61,289
|
|
|
$
|
61,622
|
|
Undisbursed construction loans
|
|
|
16,870
|
|
|
|
25,232
|
|
Home equity lines of credit
|
|
|
18,386
|
|
|
|
19,240
|
|
Future loan commitments
|
|
|
44,027
|
|
|
|
15,696
|
|
Financial standby letters of credit
|
|
|
564
|
|
|
|
604
|
|
|
|
$
|
141,136
|
|
|
$
|
122,394
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses, and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon extending credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include commercial property, residential property, deposits and securities. Patriot has established a reserve for credit loss of $8,000 and $8,000 as of September 30, 2021 and December 31, 2020, respectively, which is included in accrued expenses and other liabilities.
Standby letters of credit are written commitments issued by Patriot to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded at fair value and included in the consolidated balance sheet.
36
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 12.
|
Regulatory and Operational Matters
|
In November 2018, the Bank entered into a formal written agreement (the “Agreement”) with the OCC. The Agreement stated that the Board of the Bank would develop, implement and revise written documents and policies related to executive compensation, conflict of interest, internal audit, liquidity and asset/liability management, commercial loan administration, leveraged lending, practices relating to the allowance for loan and lease losses, and assumptions used in the Bank’s interest rate risk model. Under the Agreement, the Bank agreed to provide a revised written 3-year strategic and capital plan for the Bank. The Bank provided the documents and policies requested in the Agreement.
On September 1, 2021, the OCC terminated the Agreement concluding that the safety and soundness of the Bank and its now established compliance with laws and regulations does not require continued existence of the Agreement.
Federal and state regulatory authorities have adopted standards requiring financial institutions to maintain increased levels of capital. Effective January 1, 2015, federal banking agencies imposed four minimum capital requirements on a community bank’s risk-based capital ratios consisting of Total Capital, Tier 1 Capital, Common Equity Tier 1 (“CET1”) Capital, and a Tier 1 Leverage Capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its on- and off-balance sheet assets and activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure, liquidity, funding and market risks, quality and level of earnings, concentrations of credit, quality of loans and investments, nontraditional activity risk, policy effectiveness, and management's overall ability to monitor and control risk.
In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The CARES Act directed the federal banking agencies to issue an interim rule temporarily lowering the CBLR ratio to 8% which the agencies did with a transition back to 9% beginning January 1, 2022.
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. A community bank which meets the leverage ratio requirement and other CBLR framework requirements will not be subject to other capital and leverage requirements and will be considered “well capitalized.”
At September 30, 2021, the Bank elected to adopt the CBLR framework. The Bank’s Tier 1 leverage ratio as of September 30, 2021 and December 31, 2020 was 9.9% and 9.8%, respectively, which satisfied the “greater than 9 percent” leverage ratio requirement under the CBLR framework. Management continuously assesses the adequacy of the Bank’s capital in order to maintain its “well capitalized” status.
The Bank’s Community Bank Leverage Ratio regulatory capital amounts and ratios at September 30, 2021 and December 31, 2020 are summarized as follows:
(In thousands)
|
|
Patriot Bank, N.A.
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Amount
($)
|
|
|
Ratio
(%)
|
|
|
Amount
($)
|
|
|
Ratio
(%)
|
|
Tier 1 Leverage Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
92,719
|
|
|
|
9.878
|
|
|
|
87,844
|
|
|
|
9.794
|
|
To be Well Capitalized
|
|
|
84,476
|
|
|
|
9.000
|
(1)
|
|
|
80,721
|
|
|
|
9.000
|
(1)
|
|
(1)
|
Leverage Capital Ratio greater than 9% is considered well-capitalized under the CBLR Framework.
|
Designation as "Well Capitalized" does not apply to bank holding companies - the Company. Such categorization of capital adequacy only applies to insured depository institutions - the Bank.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 13.
|
Fair Value and Interest Rate Risk
|
Patriot measures the carrying value of certain financial assets and liabilities at fair value, as required by its policies as a financial institution and by US GAAP. The carrying values of certain assets and liabilities are measured at fair value on a recurring basis, such as available-for-sale securities; while other assets and liabilities are measured at fair value on a non-recurring basis due to external factors requiring management’s judgment to estimate potential losses of value resulting in asset impairments or the establishment of valuation reserves. Measuring assets and liabilities at fair value may result in fluctuations to carrying value that have a significant impact on the results of operations or other comprehensive income for the period and period over period.
Following is a detailed summary of the guidance provided by US GAAP regarding the application of fair value measurements and Patriot’s application thereof. Additionally, the following information includes detailed summaries of the effects fair value measurements have on the carrying amounts of asset and liabilities presented in the consolidated financial statements.
The objective of fair value measurement is to value an asset that may be sold or a liability that may be transferred at the estimated value which might be obtained in a transaction between unrelated parties under current market conditions. US GAAP establishes a framework for measuring assets and liabilities at fair value, as well as certain financial instruments classified in equity. The framework provides a fair value hierarchy, which prioritizes quoted prices in active markets for identical assets and liabilities and minimizes unobservable inputs, which are inputs for which market data are not available and that are developed by management using the best information available to develop assumptions about the value market participants might place on the asset to be sold or liability to be transferred.
The three levels of the fair value hierarchy consist of:
Level 1
|
Unadjusted quoted market prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date (such as active exchange-traded equity securities and certain U.S. and government agency debt securities).
|
|
|
Level 2
|
Observable inputs other than quoted prices included in Level 1, such as:
- Quoted prices for similar assets or liabilities in active markets (such as U.S. agency and government sponsored mortgage-backed securities)
- Quoted prices for identical or similar assets or liabilities in less active markets (such as certain U.S. and government agency debt securities, and corporate and municipal debt securities that trade infrequently)
- Other inputs that are observable for substantially the full term of the asset or liability (i.e. interest rates, yield curves, prepayment speeds, default rates, etc.).
|
|
|
Level 3
|
Valuation techniques that require unobservable inputs that are supported by little or no market activity and are significant to the fair value measurement of the asset or liability (such as pricing and discounted cash flow models that typically reflect management’s estimates of the assumptions a market participant would use in pricing the asset or liability).
|
A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.
Cash and due from banks and accrued interest receivable and payable
The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level 1. These financial instruments are not recorded at fair value on a recurring basis.
Available-for-sale securities
The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices, or using unobservable inputs employing various techniques and assumptions (Level 3).
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Other Investments
The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund totaling $4.45 million. This investment is utilized by the Bank to satisfy its Community Reinvestment Act (“CRA”) lending requirements. As this fund operates as a private fund, shares in the fund are not publicly traded but may be redeemed with 60 days’ notice at cost. For that reason, the carrying amount was considered comparable to fair value at both September 30, 2021 and December 31, 2020 due to its short-term nature.
Federal Reserve Bank Stock and Federal Home Loan Bank Stock
Shares in the Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) are purchased and redeemed based upon their $100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost.
Loans
The fair value of loans are estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We estimate the fair value of our loan portfolio using an exit price notion resulting in prior periods no longer being comparable. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions depending on facts and circumstances, such as origination rates, credit risk, transaction costs, liquidity, national and regional market trends and other adjustments, utilizing publicly available rates and indices. The application of an exit price notion requires the use of significant judgment.
Loans Held for Sale
The fair value of loans held for sale is estimated by using a market approach that includes prices for loans sold awaiting settlement and other observable inputs. The Company has determined that the inputs used to value the loans held for sale fall within Level 2 of the fair value hierarchy.
SBA Servicing Asset
Servicing assets do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds. Due to the significant unobservable input related to the servicing rights, the SBA servicing asset is classified within Level 3 of the valuation hierarchy.
Other Real Estate Owned
The fair value of OREO the Bank may obtain is based on current appraised property value less estimated costs to sell. When fair value is based on unadjusted current appraised value, OREO is classified within Level 2 of the fair value hierarchy. Patriot classifies OREO within Level 3 of the fair value hierarchy when unobservable inputs are used to determine adjustments to appraised values. Patriot does not record OREO at fair value on a recurring basis, but rather initially records OREO at fair value on a non-recurring basis and then monitors property and market conditions that may indicate a change in value is warranted.
Derivative asset (liability) - Interest Rate Swaps
The Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of interest rate swap agreements does not contain any counterparty risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy. See Notes 1 and 8 for additional disclosures on derivatives.
39
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Deposits
The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date.
The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. Patriot does not record deposits at fair value on a recurring basis.
Senior Notes, Subordinated Notes, and Junior Subordinated Debt and Note Payable
Patriot does not record senior notes at fair value on a recurring basis. The fair value of the senior notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.
Patriot does not record subordinated notes issued in September 2018 at fair value on a recurring basis. The fair value of the subordinated notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.
Patriot does not record junior subordinated debt at fair value on a recurring basis. Junior subordinated debt reprices quarterly, as a result, the carrying amount is considered a reasonable estimate of fair value.
The Company considers its own credit worthiness in determining the fair value of its Senior Notes, Subordinated Notes, Notes Payable and Junior Subordinated Debt.
Federal Home Loan Bank Borrowings
The fair value of FHLB advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances. Patriot does not record FHLB advances at fair value on a recurring basis.
Off-balance sheet financial instruments
Off-balance sheet financial instruments are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The off-balance-sheet financial instruments (i.e., commitments to extend credit) are insignificant and are not recorded on a recurring basis.
40
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The following table provides a comparison of the carrying amounts and estimated fair values of Patriot’s financial assets and liabilities as of September 30, 2021 and December 31, 2020:
(In thousands)
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Fair Value
Hierarchy
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and noninterest bearing balances due from banks
|
|
Level 1
|
|
$
|
5,298
|
|
|
$
|
5,298
|
|
|
$
|
3,006
|
|
|
$
|
3,006
|
|
Interest-bearing deposits due from banks
|
|
Level 1
|
|
|
40,967
|
|
|
|
40,967
|
|
|
|
31,630
|
|
|
|
31,630
|
|
Available-for-sale securities
|
|
Level 2
|
|
|
124,103
|
|
|
|
124,103
|
|
|
|
49,262
|
|
|
|
49,262
|
|
Other investments
|
|
Level 2
|
|
|
4,450
|
|
|
|
4,450
|
|
|
|
4,450
|
|
|
|
4,450
|
|
Federal Reserve Bank stock
|
|
Level 2
|
|
|
2,843
|
|
|
|
2,843
|
|
|
|
2,783
|
|
|
|
2,783
|
|
Federal Home Loan Bank stock
|
|
Level 2
|
|
|
5,009
|
|
|
|
5,009
|
|
|
|
4,503
|
|
|
|
4,503
|
|
Loans receivable, net
|
|
Level 3
|
|
|
704,459
|
|
|
|
705,272
|
|
|
|
719,596
|
|
|
|
716,822
|
|
Loans held for sale
|
|
Level 2
|
|
|
4,128
|
|
|
|
4,761
|
|
|
|
1,217
|
|
|
|
1,343
|
|
SBA servicing assets
|
|
Level 3
|
|
|
375
|
|
|
|
351
|
|
|
|
316
|
|
|
|
375
|
|
Other real estate owned
|
|
Level 2
|
|
|
-
|
|
|
|
-
|
|
|
|
1,906
|
|
|
|
1,906
|
|
Accrued interest receivable
|
|
Level 2
|
|
|
6,186
|
|
|
|
6,186
|
|
|
|
6,620
|
|
|
|
6,620
|
|
Interest rate swap receivable
|
|
Level 2
|
|
|
817
|
|
|
|
817
|
|
|
|
1,187
|
|
|
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets, total
|
|
|
|
$
|
898,635
|
|
|
$
|
900,057
|
|
|
$
|
826,476
|
|
|
$
|
823,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
Level 2
|
|
$
|
207,941
|
|
|
$
|
207,941
|
|
|
$
|
158,676
|
|
|
$
|
158,676
|
|
Savings deposits
|
|
Level 2
|
|
|
102,365
|
|
|
|
102,365
|
|
|
|
98,635
|
|
|
|
98,635
|
|
Money market deposits
|
|
Level 2
|
|
|
165,671
|
|
|
|
165,671
|
|
|
|
146,389
|
|
|
|
146,389
|
|
NOW accounts
|
|
Level 2
|
|
|
34,528
|
|
|
|
34,528
|
|
|
|
30,529
|
|
|
|
30,529
|
|
Time deposits
|
|
Level 2
|
|
|
197,132
|
|
|
|
197,143
|
|
|
|
210,140
|
|
|
|
210,882
|
|
Brokered deposits
|
|
Level 1
|
|
|
27,036
|
|
|
|
27,075
|
|
|
|
41,287
|
|
|
|
41,643
|
|
FHLB borrowings
|
|
Level 2
|
|
|
110,000
|
|
|
|
115,014
|
|
|
|
90,000
|
|
|
|
97,293
|
|
Senior notes
|
|
Level 2
|
|
|
11,983
|
|
|
|
12,009
|
|
|
|
11,927
|
|
|
|
12,028
|
|
Subordinated debt
|
|
Level 2
|
|
|
9,803
|
|
|
|
10,030
|
|
|
|
9,782
|
|
|
|
10,125
|
|
Junior subordinated debt owed to unconsolidated trust
|
|
Level 2
|
|
|
8,116
|
|
|
|
8,116
|
|
|
|
8,110
|
|
|
|
8,110
|
|
Note payable
|
|
Level 3
|
|
|
842
|
|
|
|
825
|
|
|
|
994
|
|
|
|
997
|
|
Accrued interest payable
|
|
Level 2
|
|
|
666
|
|
|
|
666
|
|
|
|
572
|
|
|
|
572
|
|
Interest rate swap liability
|
|
Level 2
|
|
|
817
|
|
|
|
817
|
|
|
|
1,187
|
|
|
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities, total
|
|
$
|
876,900
|
|
|
$
|
882,200
|
|
|
$
|
808,228
|
|
|
$
|
817,066
|
|
The carrying amount of cash and noninterest bearing balances due from banks, interest-bearing deposits due from banks, and demand deposits approximates fair value, due to the short-term nature and high turnover of these balances. These amounts are included in the table above for informational purposes.
41
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
In the normal course of its operations, Patriot assumes interest rate risk (i.e., the risk that general interest rate levels will fluctuate). As a result, the fair value of the Patriot’s financial assets and liabilities are affected when interest market rates change, which change may be either favorable or unfavorable. Management attempts to mitigate interest rate risk by matching the maturities of its financial assets and liabilities. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and the maturities of its financial assets and financial liabilities, adjusting the terms of new loans and deposits in an attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk through its available funds investment strategy.
The following tables detail the financial assets measured at fair value on a recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of September 30, 2021 and December 31, 2020:
(In thousands)
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency and mortgage-backed securities
|
|
$
|
-
|
|
|
$
|
89,018
|
|
|
$
|
-
|
|
|
$
|
89,018
|
|
Corporate bonds
|
|
|
-
|
|
|
|
20,222
|
|
|
|
-
|
|
|
|
20,222
|
|
Subordinated notes
|
|
|
-
|
|
|
|
4,670
|
|
|
|
-
|
|
|
|
4,670
|
|
SBA loan pools
|
|
|
-
|
|
|
|
9,634
|
|
|
|
-
|
|
|
|
9,634
|
|
Municipal bonds
|
|
|
-
|
|
|
|
559
|
|
|
|
-
|
|
|
|
559
|
|
Available-for-sale securities
|
|
$
|
-
|
|
|
$
|
124,103
|
|
|
$
|
-
|
|
|
$
|
124,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap receivable
|
|
$
|
-
|
|
|
$
|
817
|
|
|
$
|
-
|
|
|
$
|
817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability
|
|
$
|
-
|
|
|
$
|
817
|
|
|
$
|
-
|
|
|
$
|
817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency mortgage-backed securities
|
|
$
|
-
|
|
|
$
|
16,833
|
|
|
$
|
-
|
|
|
$
|
16,833
|
|
Corporate bonds
|
|
|
-
|
|
|
|
17,290
|
|
|
|
-
|
|
|
|
17,290
|
|
Subordinated notes
|
|
|
-
|
|
|
|
9,005
|
|
|
|
-
|
|
|
|
9,005
|
|
SBA loan pools
|
|
|
-
|
|
|
|
5,567
|
|
|
|
-
|
|
|
|
5,567
|
|
Municipal bonds
|
|
|
-
|
|
|
|
567
|
|
|
|
-
|
|
|
|
567
|
|
Available-for-sale securities
|
|
$
|
-
|
|
|
$
|
49,262
|
|
|
$
|
-
|
|
|
$
|
49,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap receivable
|
|
$
|
-
|
|
|
$
|
1,187
|
|
|
$
|
-
|
|
|
$
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability
|
|
$
|
-
|
|
|
$
|
1,187
|
|
|
$
|
-
|
|
|
$
|
1,187
|
|
Patriot measures certain financial assets and financial liabilities at fair value on a non-recurring basis. When circumstances dictate (e.g., impairment of long-lived assets, other than temporary impairment of collateral value), the carrying values of such financial assets and financial liabilities are adjusted to fair value or fair value less costs to sell, as may be appropriate.
During the three and nine months ended September 30, 2021 and 2020, the Company had no transfers into or out of Levels 1, 2 or 3.
42
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The table below presents the valuation methodology and unobservable inputs for level 3 assets measured at fair value on a non-recurring basis as of September 30, 2021 and December 31, 2020:
(In thousands)
|
|
Fair Value
|
|
Valuation Methodology
|
|
Unobservable Inputs
|
|
Range of Inputs
|
|
September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans, net
|
|
$
|
26,341
|
|
Real Estate Appraisals
|
|
Discount for appraisal type
|
|
|
5.8%
|
-
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA servicing assets
|
|
|
351
|
|
Discounted Cash Flows
|
|
Market discount rates
|
|
|
14.73%
|
-
|
14.90%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans, net
|
|
$
|
22,971
|
|
Real Estate Appraisals
|
|
Discount for appraisal type
|
|
|
5.8%
|
-
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned
|
|
|
1,906
|
|
Real Estate Appraisals
|
|
Discount for appraisal type
|
|
|
|
5.84%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA servicing assets
|
|
|
375
|
|
Discounted Cash Flows
|
|
Market discount rates
|
|
|
14.73%
|
-
|
14.90%
|
|
Patriot discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not necessarily represent the complete underlying value of financial instruments included in the consolidated financial statements.
The estimated fair value amounts have been measured as of September 30, 2021 and December 31, 2020, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of the financial instruments measured may be different than if they had been subsequently valued.
The information presented should not be interpreted as an estimate of the total fair value of Patriot’s assets and liabilities, since only a portion of Patriot’s assets and liabilities are required to be measured at fair value for financial reporting purposes. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between Patriot’s fair value disclosures and those of other bank holding companies may not be meaningful.