UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended March 31, 20142015

Commission file number 000-29599

 

PATRIOT NATIONAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Connecticut

06-1559137

(State of

incorporation)

 

(I.R.S. 06-1559137

 (State of incorporation)

 (I.R.S. Employer

Identification Number)

900 Bedford Street, Stamford, Connecticut 06901

(Address of principal executive offices)

(203) 324-7500

(Registrant’s telephone number)

 

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yesx    No  ¨    X   No_____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesx    X   No_____    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act:

 

Large Accelerated Filer

¨

Accelerated Filer

¨

Non-Accelerated Filer

¨  

Smaller Reporting Company

x

Large Accelerated Filer ____ Accelerated Filer ____ Non-Accelerated Filer    _ Smaller Reporting Company _ X_

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes¨   No  X_    No  x

State the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date.

Common stock, $0.01 par value per share, 39,160,6273,953,949 shares outstanding as of the close of business April 30, 2014.2015.


Table of Contents

 

 


Table of Contents

PART I- FINANCIAL INFORMATION

  Page

Part I

FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations41

Item 3.

Quantitative and Qualitative Disclosures about Market Risk53

Item 4.

Controls and Procedures54

Part II

OTHER INFORMATION

Item 1.

Legal Proceedings55

Item 1A.

Risk Factors55

Item 6.

Exhibits55

PART I—FINANCIAL INFORMATION

Item 1:

Consolidated Financial Statements

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

                                                
     (in thousands, except shares) 
     March 31, 2014   December 31, 2013 
     (Unaudited)     

ASSETS

      

Cash and due from banks:

      

Noninterest bearing deposits and cash

    $1,503    $1,570  

Interest bearing deposits

     58,254     33,296  
    

 

 

   

 

 

 

Total cash and cash equivalents

     59,757     34,866  

Securities:

      

Available for sale securities, at fair value (Note 2)

     36,815     37,701  

Other Investments

     4,450     4,450  

Federal Reserve Bank stock, at cost

     1,444     1,444  

Federal Home Loan Bank stock, at cost

     4,143     4,143  
    

 

 

   

 

 

 

Total securities

     46,852     47,738  

Loans receivable (net of allowance for loan losses: 2014: $ 5,480 2013: $5,681) (Note 3)

     415,123     418,148  

Accrued interest and dividends receivable

     1,578     1,566  

Premises and equipment, net

     14,866     15,061  

Cash surrender value of life insurance

     22,146     22,025  

Other real estate owned

     264     —    

Deferred tax asset (Note 6)

     —       —    

Other assets

     1,902     1,844  
    

 

 

   

 

 

 

Total assets

    $562,488    $541,248  
    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Liabilities

      

Deposits (Note 4):

      

Noninterest bearing deposits

    $57,967    $55,358  

Interest bearing deposits

     370,002     374,846  
    

 

 

   

 

 

 

Total deposits

     427,969     430,204  

Federal Home Loan Bank borrowings

     80,000     57,000  

Junior subordinated debt owed to unconsolidated trust

     8,248     8,248  

Accrued expenses and other liabilities

     3,659     3,955  
    

 

 

   

 

 

 

Total liabilities

     519,876     499,407  
    

 

 

   

 

 

 

Commitments and Contingencies (Note 9)

      

Shareholders’ equity (Notes 5 and 10)

      

Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding

     —       —    

Common stock, $.01 par value, 100,000,000 shares authorized; 2014 39,134,164 shares issued; 39,122,459 shares outstanding. 2013 :38,786,680 shares issued; 38,774,975 shares outstanding

     391     388  

Additional paid-in capital

     105,540     105,484  

Accumulated deficit

     (62,365   (62,684

Less: Treasury stock, at cost: 2013 and 2012, 11,705 shares

     (160   (160

Accumulated other comprehensive income

     (794   (1,187
    

 

 

   

 

 

 

Total shareholders’ equity

     42,612     41,841  
    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

    $562,488    $541,248  
    

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.Statements

1

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

                                                
     (in thousands, except per share amounts) 
     Three Months Ended 
     March 31, 
     2014     2013 

Interest and Dividend Income

        

Interest and fees on loans

     4,691       5,196  

Interest on investment securities

     135       248  

Dividends on investment securities

     41       29  

Other interest income

     12       28  
    

 

 

     

 

 

 

Total interest and dividend income

     4,879       5,501  
    

 

 

     

 

 

 

Interest Expense

        

Interest on deposits

     637       1,129  

Interest on Federal Home Loan Bank borrowings

     33       351  

Interest on subordinated debt

     200       71  

Interest on other borrowings

     —         76  
    

 

 

     

 

 

 

Total interest expense

     870       1,627  
    

 

 

     

 

 

 

Net interest income

     4,009       3,874  

Provision for Loan Losses (Note 3)

     —         (30
    

 

 

     

 

 

 

Net interest income after provision for loan losses

     4,009       3,904  
    

 

 

     

 

 

 

Non-Interest Income

        

Mortgage banking activity

     —         46  

Loan application, inspection & processing fees

     66       38  

Fees and service charges

     219       171  

Earnings on cash surrender value of life insurance

     121       127  

Other income

     187       105  
    

 

 

     

 

 

 

Total non-interest income

     593       487  
    

 

 

     

 

 

 

Non-Interest Expense

        

Salaries and benefits (Note 5)

     1,971       3,005  

Occupancy and equipment expense

     922       1,039  

Data processing expense

     250       371  

Advertising and promotional expenses

     51       42  

Professional services and other outside services

     471       889  

Loan administration and processing expenses

     17       77  

Regulatory assessments

     230       374  

Insurance expense

     97       79  

Other real estate operations

     16       2  

Material and communications

     93       106  

Other operating expenses

     165       385  
    

 

 

     

 

 

 

Total non-interest expense

     4,283       6,369  
    

 

 

     

 

 

 

Income (loss) before income taxes

     319       (1,978

Benefit for Income Taxes

     —         (21
    

 

 

     

 

 

 

Net income (loss)

     319       (1,957
    

 

 

     

 

 

 

Basic and diluted income (loss) per share (Note 7)

     0.01       (0.05
    

 

 

     

 

 

 

See Accompanying Notes to Consolidated Financial Statements.Balance Sheets (unaudited)

1

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

                                                
     (in thousands) 
     Three Months Ended 
     March 31, 
     2014     2013 

Net income (loss)

    $319      $(1,957

Other comprehensive income:

        

Unrealized holding gains arising during the period

     393       55  
    

 

 

     

 

 

 

Total

     393       55  
    

 

 

     

 

 

 

Comprehensive income (loss)

    $712      $(1,902
    

 

 

     

 

 

 

See Accompanying Notes to Consolidated Financial Statements.Statements of Operations (unaudited)

2

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

                                                                                                                                                                        
            Accumulated     
                 Additional           Other     
     Number of     Common     Paid-In   Accumulated   Treasury   Comprehensive     
(in thousands, except shares)    Shares     Stock     Capital   Deficit   Stock   Income (Loss)   Total 

Three months ended March 31, 2013

                    

Balance at December 31, 2012

     38,480,114      $385      $105,356    $(55,395  $(160  $(618  $49,568  

Comprehensive loss

                    

Net loss

     —         —         —       (1,957   —       —       (1,957

Unrealized holding gain on available for sale securities, net of taxes

     —         —         —       —       —       55     55  
                    

 

 

 

Total comprehensive loss

                     (1,902
                    

 

 

 

Share-based compensation expense

     —         —         7     —       —       —       7  
    

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

     38,480,114      $385      $105,363    $(57,352  $(160  $(563  $47,673  
    

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended March 31, 2014

                    

Balance at December 31, 2013

     38,774,975      $388      $105,484    $(62,684  $(160  $(1,187  $41,841  

Comprehensive income

                    

Net income

     —         —         —       319     —       —       319  

Unrealized holding gain on available for sale securities, net of taxes

     —         —         —       —       —       393     393  
                    

 

 

 

Total comprehensive income

                     712  
                    

 

 

 

Share-based compensation expense

     —         —         59     —       —       —       59  

Issuance of restricted stock

     347,484       3       (3         —    
    

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

     39,122,459      $391      $105,540    $(62,365  $(160  $(794  $42,612  
    

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.Statements of Comprehensive Income (unaudited)

3

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

                                                
     (in thousands) 
     Three Months Ended 
     March 31, 
     2014   2013 

Cash Flows from Operating Activities:

      

Net income (loss):

    $319    $(1,957

Adjustments to reconcile net income (loss) to net cash

      

provided by (used in) operating activities:

      

Amortization of investment premiums, net

     66     38  

Amortization and accretion of purchase loan premiums and discounts, net

     18     2  

Provision for loan losses

     —       (30

Gain on sale of mortgage loans

     —       (42

Originations of mortgage loans held for sale

     —       (7,154

Proceeds from sales of mortgage loans held for sale

     —       2,171  

Earnings on cash surrender value of life insurance

     (121   (127

Depreciation and amortization

     293     289  

Gain on sale of other real estate owned

     —       (200

Share-based compensation

     59     7  

Changes in assets and liabilities:

      

(Increase) in net deferred loan costs

     (13   (58

(Increase) decrease in accrued interest and dividends receivable

     (12   8  

(Increase) decrease in other assets

     (58   42  

Decrease in accrued expenses and other liabilities

     (296   (1,521
    

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     255     (8,532
    

 

 

   

 

 

 

Cash Flows from Investing Activities:

      

Principal repayments on available for sale securities

     1,213     632  

Proceeds from repurchase of excess stock by Federal Reserve Bank

     —       37  

Proceeds from repurchase of excess stock by Federal Home Loan Bank

     —       201  

Net decrease in loans

     3,020     2,938  

Purchase of other real estate owned

     (264   —    

Proceeds from sale of other real estate owned

     —       1,310  

Purchase of bank premises and equipment, net

     (98   (239
    

 

 

   

 

 

 

Net cash provided by investing activities

     3,871     4,879  
    

 

 

   

 

 

 

Cash Flows from Financing Activities:

      

Net increase in demand, savings and money market deposits

     5,073     7,245  

Net decrease in time certificates of deposits

     (7,308   (12,842

Increase in FHLB borrowings

     23,000     —    
    

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     20,765     (5,597
    

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     24,891     (9,250

Cash and Cash Equivalents:

      

Beginning

     34,866     71,014  
    

 

 

   

 

 

 

Ending

    $59,757    $61,764  
    

 

 

   

 

 

 

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

(Unaudited)

                                                
     (in thousands) 
     Three Months Ended 
     March 31, 
     2014     2013 

Supplemental Disclosures of Cash Flow Information

        

Interest paid

    $669      $1,561  
    

 

 

     

 

 

 

Income taxes paid

    $—        $—    
    

 

 

     

 

 

 

Supplemental disclosures of noncash operating, investing and financing activities:

        

Unrealized holding gain on available for sale securities arising during the period

    $393      $55  
    

 

 

     

 

 

 

Transfer of loans to other real estate owned

    $264      $—    
    

 

 

     

 

 

 

Reduction in deposits held for sale

    $—        $3,777  
    

 

 

     

 

 

 

Reduction in branch assets held for sale

    $—        $8  
    

 

 

     

 

 

 

See Accompanying Notes to Consolidated Financial Statements.Statements of Shareholders’ Equity (unaudited)

4

PATRIOT NATIONAL BANCORP, INC.Consolidated Statements of Cash Flows (unaudited)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)5

Note 1: BasisItem 2: Management's Discussion and Analysis of Financial Statement Presentation

The Consolidated Balance Sheet at December 31, 2013 has been derived from the audited financial statementsCondition and Results of Patriot National Bancorp, Inc. (“Bancorp” or “the Company”) at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.Operations

The accompanying unaudited financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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 have been omitted. The accompanying consolidated financial statements and related notes should be read in conjunction with the audited financial statements of Bancorp and notes thereto for the year ended December 31, 2013.37

The information furnished reflects, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results of operations that may be expected for the remainder of 2014.

Note 2: Investment Securities

The amortized cost, gross unrealized gains, gross unrealized lossesItem 3: Quantitative and approximate fair values of available-for-sale securities at March 31, 2014Qualitative Disclosures about Market Risk

48

Item 4: Controls and December 31, 2013 are as follows:Procedures

50

                                                                                                
           Gross     Gross    
      Amortized     Unrealized     Unrealized  Fair 
(in thousands)    Cost     Gains     Losses  Value 

March 31, 2014:

             

U. S. Government agency bonds

    $7,500      $—        $(255 $7,245  

U. S. Government agency mortgage-backed securities

     21,109       —         (477  20,632  

Corporate bonds

     9,000       —         (62  8,938  
    

 

 

     

 

 

     

 

 

  

 

 

 
    $37,609      $—        $(794 $36,815  
    

 

 

     

 

 

     

 

 

  

 

 

 

December 31, 2013:

             

U. S. Government agency bonds

    $7,500      $—        $(421 $7,079  

U. S. Government agency mortgage-backed securities

     22,388       —         (636  21,752  

Corporate bonds

     9,000       —         (130  8,870  
    

 

 

     

 

 

     

 

 

  

 

 

 
    $38,888      $—        $(1,187 $37,701  
    

 

 

     

 

 

     

 

 

  

 

 

 

PART II - OTHER INFORMATION

The following table presents the gross unrealized loss and fair value of Bancorp’s available-for-sale securities, aggregated by the length of time the individual securities have been in a continuous loss position, at March 31, 2014 and December 31, 2013:

                                                                                                                                                
     Less Than 12 Months   12 Months or More   Total 
      Fair     Unrealized   Fair     Unrealized   Fair     Unrealized 
(in thousands)    Value     Loss   Value     Loss   Value     Loss 

March 31, 2014:

                    

U. S. Government agency bonds

    $7,245      $(255  $—        $—      $7,245      $(255

U. S. Government agency mortgage - backed securities

     8,402       (233   12,204       (244   20,606       (477

Corporate bonds

     —         —       8,938       (62   8,938       (62
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Totals

    $15,647      $(488  $21,142      $(306  $36,789      $(794
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

December 31, 2013:

                    

U. S. Government agency bonds

                    

U. S. Government agency mortgage - backed securities

    $7,079      $(421  $—        $—      $7,079      $(421

Corporate bonds

     8,871       (291   12,856       (345   21,727       (636

Totals

     —         —       8,870       (130   8,870       (130
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 
    $15,950      $(712  $21,726      $(475  $37,676      $(1,187
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

At March 31, 2014, eleven securities had unrealized holding losses with aggregate depreciation of 2.1% from the amortized cost. At December 31, 2013, eleven securities had unrealized losses with aggregate depreciation of 3.2% from the amortized cost.

Bancorp performs a quarterly analysis of those securities that are in an unrealized loss position to determine if those losses qualify as other-than-temporary impairments. This analysis considers the following criteria in its determination: the ability of the issuer to meet its obligations, when the loss position is due to a deterioration in credit quality, management’s plans and ability to maintain its investment in the security, the length of time and the amount by which the security has been in a loss position, the interest rate environment, the general economic environment and prospects or projections for improvement or deterioration.

Management believes that none of the unrealized losses on available-for-sale securities noted above are other than temporary due to the fact that they relate to market interest rate changes on U.S. Government agency debt, corporate debt and mortgage -backed securities issued by U.S. Government agencies. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade and the Company expects to receive all contractual principal and interest related to these investments. Because the Company does not intend to sell the investments, and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2014.

The amortized cost and fair value of available-for-sale debt securities at March 31, 2014 by contractual maturity are presented below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be prepaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following summary:

                                                
(in thousands)    Amortized
Cost
     Fair
Value
 

Maturity:

        

Corporate bonds 5 to 10 years

    $9,000      $8,938  

U.S. Government agency bonds < 5 years

     2,500       2,458  

U.S. Government agency bonds 5 to 10 years

     5,000       4,787  

U.S. Government agency mortgage-backed securities

     21,109       20,632  
    

 

 

     

 

 

 

Total

    $37,609      $36,815  
    

 

 

     

 

 

 

Note 3: Loans Receivable and Allowance for Loan Losses

A summary of the Company’s loan portfolio at March 31, 2014 and December 31, 2013 is as follows:

                                                
     March 31,   December 31, 
(in thousands)    2014   2013 

Real Estate

      

Commercial

    $218,051    $223,165  

Residential

     103,019     106,198  

Construction

     260     260  

Construction to permanent

     12,650     11,303  

Commercial

     38,752     35,061  

Consumer home equity

     43,717     44,081  

Consumer installment

     3,389     2,990  
    

 

 

   

 

 

 

Total Loans

     419,838     423,058  

Premiums on purchased loans

     182     200  

Net deferred costs

     583     571  

Allowance for loan losses

     (5,480   (5,681
    

 

 

   

 

 

 

Loans receivable, net

    $415,123    $418,148  
    

 

 

   

 

 

 

The changes in the allowance for loan losses for the periods shown are as follows:

                                                
     Three months ended 
     March 31, 
(in thousands)    2014   2013 

Balance, beginning of period

    $5,681    $6,016  

Provision for loan losses

     —       (30

Loans charged-off

     (217   (306

Recoveries of loans previously charged-off

     16     37  
    

 

 

   

 

 

 

Balance, end of period

    $5,480    $5,717  
    

 

 

   

 

 

 

Loans past due ninety days or more, and still accruing interest were $834,000 and $866,000 at March 31, 2014, and December 31, 2013 respectively, and consisted of one loan at March 31, 2014 and two loans at December 31, 2013. The subject loan at March 31, 2014 was current as to interest payments but was past the loan’s maturity date and in the process of being renewed. It was approved for renewal in April, 2014. At December 31, 2013, the previously noted loan had a balance of $841,000 and was current and a second loan for $25,000 was current within 60 days as to interest payments. Both were past their maturity date and in the process of being renewed at December 31, 2013.

The unpaid principal balances of loans on nonaccrual status and considered impaired were $10.2 million at March 31, 2014 and $12.3 million at December 31, 2013. If non-accrual loans had been performing in accordance with their contractual terms, the Company would have recorded approximately $33,000 of additional income during the quarter ended March 31, 2014 and $306,000 during the quarter ended March 31, 2013.

For the three months ended March 31, 2014 and 2013, the interest collected and recognized as income on impaired loans, which includes non-accrual loans, TDRs and loans that were previously classified as TDRs that have been upgraded, was approximately $113,000 and $125,000 respectively. The average recorded investment in impaired loans for the three months ended March 31, 2014 was $21.5 million.

At March 31, 2014, there were 3 loans totaling $3.4 million that were considered “troubled debt restructurings,” as compared to December 31, 2013 when there were 2 loans totaling $2.2 million, all of which were included in impaired loans. At March 31, 2014, 2 of the 3 loans aggregating $2.1 million were accruing loans and 1 loan of $1.3 million was a non-accruing loan. The non-accruing loan was an existing TDR at December 31, 2013 which was restructured again in the quarter ended March 31, 2014.

The Company’s lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County and New York City in New York. The Company originates commercial real estate loans, commercial business loans, and a variety of other consumer loans. In addition, the Company previously had originated loans for residential real estate, the construction of residential homes, residential developments and for land development projects. A moratorium on all new speculative construction loans was instituted by management in July 2008. All residential and commercial mortgage 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.

The Company has established credit policies applicable to each type of lending activity in which it engages, evaluates the creditworthiness of each customer and, in most cases, extends credit of up to 75% of the market value of the collateral for commercial real estate at the date of the credit extension depending on the Company’s evaluation of the borrowers’ creditworthiness and type of collateral and up to 80% for residential 1-4 family real estate. In the case of construction loans, the maximum loan-to-value was 65% of the “as completed” market value. The market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted. Real estate is the primary form of collateral. Other important forms of collateral are accounts receivable, inventory, other business assets, marketable securities and time deposits. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrower’s ability to generate continuing cash flows on all loans not related to construction.

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

Commercial Real Estate Loans –In underwriting commercial real estate loans, the Company 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 or should there be a substantial decline in the value of the property securing the loan or a decline in the general economic conditions. Where the owner occupies the property, the Company also evaluates the business’s ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignments and/or the guarantee of the operating company when the property is owner occupied.

Commercial and Industrial Loans– The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are usually made to finance the purchase of inventory or new or used equipment and 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 this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees, where obtained, as a secondary source. Payments on such loans are often dependent upon the successful operation of the underlying business involved. Repayment of such loans may therefore be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower or loss of market for the borrower’s products or services.

Residential Real Estate Loans– Various loans secured by residential real estate properties are offered by the Company, including 1-4 family residential loans and a variety of home equity line of credit products. Repayment of such loans may be negatively impacted should the borrower default, should there be a significant decline in the value of the property securing the loan or should there be decline in general economic conditions.

Construction Loans– Construction loans are short-term loans (generally up to 18 months) secured by land for both residential and commercial development. The loans are generally made for acquisition and improvements. Funds are disbursed as phases of construction are completed. Included in this category are loans to construct single family homes where no contract of sale exists, based upon the experience and the financial strength of the builder, the type and location of the property and other factors. Construction loans are generally personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by the builders’ inability to complete construction, by a downturn in the new construction market, by a significant increase in interest rates or by decline in general economic conditions.

Other Loans– The Company also offers installments loans and reserve lines of credit to individuals. Repayments of such loans are often dependent on the personal income of the borrower which may be negatively impacted by adverse changes in economic conditions. The Company does not place an 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 typically characterized by payment delinquencies, previous charge-offs judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.

The following table sets forth activity in our allowance for loan losses, by loan type, for the three months ended March 31, 2014. The following table also details the amount of loans receivable, net, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment.

(in thousands)

Three months ended March 31, 2014

 Commercial  Commercial
Real Estate
  Construction  Construction
to Permanent
  Residential  Consumer  Unallocated  Total 

Allowance for loan losses:

        

Beginning Balance

 $2,285   $1,585   $260   $25   $795   $534   $197   $5,681  

Charge-offs

  (9  —      —      —      (178  (30  —      (217

Recoveries

  —      —      —      —      15    1    —      16  

Provision

  95    (265  —      9    72    34    55    —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending Balance

 $2,371   $1,320   $260   $34   $704   $539   $252   $5,480  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance: individually evaluated for impairment

 $1,500   $17   $260   $—     $21   $2   $—     $1,800  

Ending balance: collectively evaluated for impairment

  871    1,303    —      34    683    537    252    3,680  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Allowance for Loan Losses

 $2,371   $1,320   $260   $34   $704   $539   $252   $5,480  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Loans ending balance

 $38,752   $218,051   $260   $12,650   $103,019   $47,106   $—     $419,838  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance: individually evaluated for impairment

 $6,052   $8,855   $260   $—     $5,179   $587   $—     $20,933  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance : collectively evaluated for impairment

 $32,700   $209,196   $—     $12,650   $97,840   $46,519   $—     $398,905  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The following table sets forth activity in our allowance for loan losses, by loan type, for the year ended December 31, 2013. The following table also details the amount of loans receivable, net, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment.

(in thousands)

2013

  Commercial  Commercial
Real Estate
  Construction  Construction
to Permanent
   Residential  Consumer  Unallocated   Total 

Allowance for loan losses:

           

Beginning Balance

  $942   $3,509   $311   $19    $897   $217   $121    $6,016  

Charge-offs

   (63  (403  (205  —       (919  (78  —       (1,668

Recoveries

   4    335    20    —       1    3    —       363  

Provision

   1,402    (1,856  134    6     816    392    76     970  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending Balance

  $2,285   $1,585   $260   $25    $795   $534   $197    $5,681  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $1,500   $31   $260   $—      $98   $2   $—      $1,891  

Ending balance: collectively evaluated for impairment

   785    1,554    —      25     697    532    197     3,790  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total Allowance for Loan Losses

  $2,285   $1,585   $260   $25    $795   $534   $197    $5,681  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total Loans ending balance

  $35,061   $223,165   $260   $11,303    $106,198   $47,071   $—      $423,058  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   6,152    7,767    260    1,197     6,024    593    —       21,993  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance : collectively evaluated for impairment

  $28,909   $215,398   $—     $10,106    $100,174   $46,478   $—      $401,065  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

The Company monitors the credit quality of its loans receivable on an ongoing manner. Credit quality is monitored by reviewing certain credit quality indicators. Management has determined that internally assigned risk ratings and loan-to-value ratios (LTVs), at period end, are the key credit quality indicators that best help management monitor the credit quality of the Company’s loans receivable. Loan-to-value ratios used by management in monitoring credit quality are based on current period loan balances and original values at time of origination (unless a current appraisal has been obtained as a result of the loan being deemed impaired or the loan is a maturing construction loan).

Appraisals on properties securing non-performing loans and Other Real Estate Owned (“OREO”) are updated annually. We update our impairment analysis monthly based on the most recent appraisal as well as other factors (such as senior lien positions, e.g. property taxes).

The majority of the Company’s impaired loans have been resolved through courses of action other than via bank liquidations of real estate collateral through OREO. These include normal loan payoffs, the traditional workout process, triggering personal guarantee obligations, and troubled debt restructurings. However, as loan workout efforts progress to a point where the bank’s liquidation of real estate collateral is the likely outcome, the impairment analysis is updated to reflect actual recent experience with bank sales of OREO properties.

A disposition discount is built into our impairment analysis and reflected in our allowance once a property is determined to be a likely OREO (e.g. foreclosure is probable). To determine the discount we compare the average sales prices of our prior OREO properties to the appraised value that was obtained as of the date when we took title to the property. The difference is the bank-owned disposition discount.

The Company has a risk rating system as part of the risk assessment of its loan portfolio. The Company’s lending officers are required to assign an Obligor and a Facility risk rating to each loan in their portfolio at origination, which is ratified or modified by the Committee to which the loan is submitted for approval. When the lender learns of important financial developments, the risk rating is reviewed accordingly, and adjusted if necessary. Similarly, the Loan Committee can adjust a risk rating.

In addition, the Company engages a third party independent loan reviewer that performs quarterly reviews of a sample of loans, validating the Bank’s risk ratings assigned to such loans. The risk ratings play an important role in the establishment of the loan loss provision and to confirm the adequacy of the allowance for loan losses. Any upgrades to classified loans must be approved by the Board 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: An asset is considered “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or of 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 the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”

Charge–off generally commences after the loan is classified “doubtful” to reduce the loan to its recoverable balance. If the account is classified as “loss”, the full balance is charged off regardless of the potential recovery from the sale of the collateral. This amount is recognized as a recovery once the collateral is sold.

In accordance with FFIEC (“Federal Financial Institutions Examination Council”) published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” credits are charged-off when 180 days delinquent and “Closed-end” credits are charged-off when 120 days delinquent.

The following table details the credit risk exposure of loans receivable, by loan type and credit quality indicator at March 31, 2014:

CREDIT RISK PROFILE BY CREDIT WORTHINESS CATEGORY

(in thousands) Commercial  Commercial
Real Estate
  Construction  Construction
to Permanent
  Residential
Real Estate
  Consumer    
LTVs: < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  Other  Total 

Internal Risk Rating

              

Pass

 $27,343   $3,760   $195,649   $7,178   $—     $—     $8,050   $4,600   $81,304   $19,640   $42,661   $3,756   $654   $394,595  

Special Mention

  159    —      5,774    2,477    —      —      —      —      —      —      —      —      —      8,410  

Substandard

  7,490    —      3,664    3,309    60    200    —      —      1,576    499    35    —      —      16,833  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $34,992   $3,760   $205,087   $12,964   $60   $200   $8,050   $4,600   $82,880   $20,139   $42,696   $3,756   $654   $419,838  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

CREDIT RISK PROFILE

                                                                                                                                                                        
      Commercial     Commercial
Real Estate
     Construction     Construction  to
Permanent
     Residential             
(in thousands)                    Real Estate     Consumer     Totals 

Performing

    $32,700      $216,302      $—        $12,650      $100,944      $47,076      $409,672  

Non Performing

     6,052       1,749       260       —         2,075       30       10,166  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $38,752      $218,051      $260      $12,650      $103,019      $47,106      $419,838  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

The following table details the credit risk exposure of loans receivable, by loan type and credit quality indicator at December 31, 2013:

CREDIT RISK PROFILE BY CREDIT WORTHINESS CATEGORY

(in thousands) Commercial  Commercial
Real Estate
  Construction  Construction to
Permanent
  Residential
Real Estate
  Consumer    
LTVs: < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  Other  Total 

Internal Risk Rating

              

Pass

 $23,493   $3,898   $199,118   $7,951   $—     $—     $10,106   $—     $82,704   $20,592   $42,542   $3,839   $650   $394,893  

Special Mention

  167    —      6,573    2,502    —      —      —      —      —      —      —      —      —      9,242  

Substandard

  7,503    —      3,690    3,331    60    200    1,197    —      1,976    926    9    31    —      18,923  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $31,163   $3,898   $209,381   $13,784   $60   $200   $11,303   $—     $84,680   $21,518   $42,551   $3,870   $650   $423,058  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

CREDIT RISK PROFILE

   Commercial  Commercial
Real Estate
  Construction  Construction to
Permanent
  Residential       
(in thousands)     Real Estate  Consumer  Totals 

Performing

 $28,909   $221,401   $—     $10,106   $103,296   $47,038   $410,750  

Non Performing

  6,152    1,764    260    1,197    2,902    33    12,308  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $35,061   $223,165   $260   $11,303   $106,198   $47,071   $423,058  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The following table sets forth the detail, and delinquency status, of non-accrual loans and past due loans at March 31, 2014:

                                                                                                                                                                        
     Non-Accrual and Past Due Loans 
     Non-Accrual Loans             

(in thousands)

2014

    31-60 Days
Past Due
     61-90 Days
Past Due
     Greater Than
90 Days
     Total Past Due     Current     >90 Days Past
Due and
Accruing
     Total Non-
Accrual and
Past Due
Loans
 

Commercial

                            

Substandard

    $—        $—        $2      $2      $6,050      $—        $6,052  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial

    $—        $—        $2      $2      $6,050      $—        $6,052  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Commercial Real Estate

                            

Substandard

    $—        $—        $313      $313      $1,436      $834      $2,583  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial Real Estate

    $—        $—        $313      $313      $1,436      $834      $2,583  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction

                            

Substandard

    $—        $—        $260      $260      $—        $—        $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction

    $—        $—        $260      $260      $—        $—        $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Residential Real Estate

                            

Substandard

    $—        $—        $2,075      $2,075      $—        $—        $2,075  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Residential Real Estate

    $—        $—        $2,075      $2,075      $—        $—        $2,075  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Consumer

                            

Substandard

    $—        $—        $2      $2      $28      $—        $30  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Consumer

    $—        $—        $2      $2      $28      $—        $30  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $—        $—        $2,652      $2,652      $7,514      $834      $11,000  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

The following table sets forth the detail, and delinquency status, of non-accrual loans and past due loans at December 31, 2013:

                                                                                                                                                                        
     Non-Accrual and Past Due Loans 
     Non-Accrual Loans             

(in thousands)

2013

    31-60 Days
Past Due
     61-90 Days
Past Due
     Greater Than
90 Days
     Total Past
Due
     Current     >90 Days
Past Due
and
Accruing
     Total Non-
Accrual and
Past Due Loans
 

Commercial

                            

Pass

    $—        $—        $—        $—        $—        $25      $25  

Substandard

     —         —         2       2       6,150       —         6,152  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial

    $—        $—        $2      $2      $6,150      $25      $6,177  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Commercial Real Estate

                            

Substandard

    $—        $—        $1,764      $1,764      $—        $841      $2,605  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial Real Estate

    $—        $—        $1,764      $1,764      $—        $841      $2,605  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction

                            

Substandard

    $—        $—        $260      $260      $—        $—        $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction

    $—        $—        $260      $260      $—        $—        $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction to Permanent

                            

Substandard

    $—        $—        $—        $—        $1,197      $—        $1,197  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction to Permanent

    $—        $—        $—        $—        $1,197      $—        $1,197  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Residential Real Estate

                            

Substandard

    $—        $—        $2,523      $2,523      $379      $—        $2,902  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Residential Real Estate

    $—        $—        $2,523      $2,523      $379      $—        $2,902  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Consumer

                            

Substandard

    $—        $—        $2      $2      $31      $—        $33  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Consumer

    $—        $—        $2      $2      $31      $—        $33  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $—        $—        $4,551      $4,551      $7,757      $866      $13,174  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The recorded balance of these non-accrual loans was $10.2 million and $12.3 million at March 31, 2014, and December 31, 2013 respectively. Generally, loans are placed on non-accruing status when they become 90 days or more delinquent, and remain on non-accrual status until they are brought current, have six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a non-accruing status. Additionally, certain loans that cannot demonstrate sufficient global cash flow to continue loan payments in the future and certain troubled debt restructures (TDRs) are placed on non-accrual status.

Loans past due ninety days or more, and still accruing interest were $834,000 and $866,000 at March 31, 2014, and December 31, 2013 respectively, and consisted of one loan at March 31, 2014 and two loans at December 31, 2013. The subject loan at March 31, 2014 was current as to interest payments but was past the loan’s maturity date and in the process of being renewed. It was approved for renewal in April, 2014. At December 31, 2013, the previously noted loan had a balance of $841,000 and was current and a second loan for $25,000 was current within 60 days as to interest payments.

Both were past the loan’s maturity date and in the process of being renewed at December 31, 2013.

The following table sets forth the detail and delinquency status of loans receivable, by performing and non-performing loans at March 31, 2014.

                                                                                                                                                                        
     Performing (Accruing) Loans             

(in thousands)

2014

    31-60 Days
Past Due
     61-90 Days
Past Due
     Total Past
Due
     Current     Total
Performing
Loans
     Total Non-
Accrual and
Past Due
Loans
     Total Loans 

Commercial

                            

Pass

    $120      $—        $120      $30,983      $31,103      $—        $31,103  

Special Mention

     16       —         16       143       159       —         159  

Substandard

     —         —         —         1,438       1,438       6,052       7,490  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial

    $136      $—        $136      $32,564      $32,700      $6,052      $38,752  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Commercial Real Estate

                            

Pass

    $654      $1,188      $1,842      $200,986      $202,828      $—        $202,828  

Special Mention

     —         —         —         8,251       8,251       —         8,251  

Substandard

     —         —         —         4,389       4,389       2,583       6,972  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial Real Estate

    $654      $1,188      $1,842      $213,626      $215,468      $2,583      $218,051  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction

                            

Substandard

    $—        $—        $—        $—        $—        $260      $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction

    $—        $—        $—        $—        $—        $260      $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction to Permanent

                            

Pass

    $—        $—        $—        $12,650      $12,650      $—        $12,650  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction to Permanent

    $—        $—        $—        $12,650      $12,650      $—        $12,650  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Residential Real Estate

                            

Pass

    $53      $—        $53      $100,891      $100,944      $—        $100,944  

Substandard

     —         —         —         —         —         2,075       2,075  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Residential Real Estate

    $53      $—        $53      $100,891      $100,944      $2,075      $103,019  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Consumer

                            

Pass

    $4      $—        $4      $47,067      $47,071      $—        $47,071  

Substandard

     —         —         —         5       5       30       35  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Consumer

    $4      $—        $4      $47,072      $47,076      $30      $47,106  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $847      $1,188      $2,035      $406,803      $408,838      $11,000      $419,838  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

The following table sets forth the detail and delinquency status of loans receivable by performing and non-performing loans at December 31, 2013.

                                                                                                                                                                        
     Performing (Accruing) Loans             

(in thousands)

2013

    31-60 Days
Past Due
     61-89 Days
Past Due
     Total Past
Due
     Current     Total Loan
Balances
     Total Non-
Accrual and
Past Due Loans
     Total Loans
Receivable
 

Commercial

                            

Pass

    $725      $—        $725      $26,641      $27,366      $25      $27,391  

Special Mention

     —         —         —         167       167       —         167  

Substandard

     —         —         —         1,351       1,351       6,152       7,503  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial

    $725      $—        $725      $28,159      $28,884      $6,177      $35,061  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Commercial Real Estate

                            

Pass

    $1,858      $266      $2,124      $204,944      $207,068      $—        $207,068  

Special Mention

     —         —         —         9,075       9,075       —         9,075  

Substandard

     —         —         —         4,417       4,417       2,605       7,022  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial Real Estate

    $1,858      $266      $2,124      $218,436      $220,560      $2,605      $223,165  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction

                            

Substandard

    $—        $—        $—        $—        $—        $260      $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction

    $—        $—        $—        $—        $—        $260      $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction to Permanent

                            

Pass

    $—        $—        $—        $10,106      $10,106      $—        $10,106  

Substandard

     —         —         —         —         —         1,197       1,197  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction to Permanent

    $—        $—        $—        $10,106      $10,106      $1,197      $11,303  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Residential Real Estate

                            

Pass

    $32      $—        $32      $103,264      $103,296      $—        $103,296  

Substandard

     —         —         —         —         —         2,902       2,902  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Residential Real Estate

    $32      $—        $32      $103,264      $103,296      $2,902      $106,198  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Consumer

                            

Pass

    $350      $560      $910      $46,121      $47,031      $—        $47,031  

Substandard

     7       —         7       —         7       33       40  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Consumer

    $357      $560      $917      $46,121      $47,038      $33      $47,071  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $2,972      $826      $3,798      $406,085      $409,884      $13,174      $423,058  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

The following table summarizes impaired loans as of March 31, 2014:

                                                                        
(in thousands)                  
     Recorded
Investment
     Unpaid Principal
Balance
     Related Allowance 

With no related allowance recorded:

            

Commercial

    $2      $160      $—    

Commercial Real Estate

     8,699       9,537       —    

Construction

     —         —         —    

Construction to Permanent

     —         —        

Residential

     4,680       7,203       —    

Consumer

     585       664       —    
    

 

 

     

 

 

     

 

 

 

Total:

    $13,966      $17,564      $—    

With an allowance recorded:

            

Commercial

    $6,050      $6,050      $1,500  

Commercial Real Estate

     156       210       17  

Construction

     260       487       260  

Construction to Permanent

     —         —         —    

Residential

     499       545       21  

Consumer

     2       2       2  
    

 

 

     

 

 

     

 

 

 

Total:

    $6,967      $7,294      $1,800  

Commercial

    $6,052      $6,210      $1,500  

Commercial Real Estate

     8,855       9,747       17  

Construction

     260       487       260  

Construction to Permanent

     —         —         —    

Residential

     5,179       7,748       21  

Consumer

     587       666       2  
    

 

 

     

 

 

     

 

 

 

Total:

    $20,933      $24,858      $1,800  
    

 

 

     

 

 

     

 

 

 

Impaired loans consist of non-accrual loans, TDRs and loans that were previously classified as TDRs that have been upgraded.

The following table summarizes impaired loans as of December 31, 2013:

                                                                        
(in thousands)      
     Recorded
Investment
     Unpaid Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

            

Commercial

    $2      $151      $—    

Commercial Real Estate

     7,597  ��    8,316       —    

Construction

     —         —         —    

Construction to Permanent

     1,197       1,425       —    

Residential

     5,098       7,632       —    

Consumer

     591       670       —    
    

 

 

     

 

 

     

 

 

 

Total:

    $14,485      $18,194      $—    

With an allowance recorded:

            

Commercial

    $6,150      $6,150      $1,500  

Commercial Real Estate

     170       215       31  

Construction

     260       487       260  

Construction to Permanent

     —         —         —    

Residential

     926       1,066       98  

Consumer

     2       2       2  
    

 

 

     

 

 

     

 

 

 

Total:

    $7,508      $7,920      $1,891  

Commercial

    $6,152      $6,301      $1,500  

Commercial Real Estate

     7,767       8,531       31  

Construction

     260       487       260  

Construction to Permanent

     1,197       1,425       —    

Residential

     6,024       8,698       98  

Consumer

     593       672       2  
    

 

 

     

 

 

     

 

 

 

Total:

    $21,993      $26,114      $1,891  
    

 

 

     

 

 

     

 

 

 

The recorded investment of impaired loans at March 31, 2014 and December 31, 2013 was $20.9 million and $22.0 million, with related allowances of $1.8 million and $1.9 million, respectively.

Included in the tables above at March 31, 2014 and December 31, 2013 are loans with carrying balances of $14.0 million and $14.5 million that required no specific reserves in our allowance for loan losses. Loans that did not require specific reserves have sufficient collateral values, less costs to sell, supporting the carrying balances of the loans. In some cases, there may be no specific reserves because the Company already charged-off the specific impairment. Once a borrower is in default, the Company is under no obligation to advance additional funds on unused commitments.

On a case-by-case basis, the Company may agree to modify the contractual terms of a borrower’s loan to remain competitive and assist customers who may be experiencing financial difficulty, as well as to preserve the Company’s position in the loan. If the borrower is experiencing financial difficulties and a concession has been made, the loan is classified as a troubled debt restructured loan.

The following table presents the total troubled debt restructured loans as of March 31, 2014:

                                                                                                                                                
     Accrual     Non-accrual     Total 
     # of           # of           # of       
(Dollars in thousands)    Loans     Amount     Loans     Amount     Loans     Amount 

Commercial Real Estate

     2      $2,128       1      $1,280       3      $3,408  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Troubled Debt Restructurings

     2      $2,128       1      $1,280       3      $3,408  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

The following table presents the total troubled debt restructured loans as of December 31, 2013:

                                                                                                                                                
     Accrual     Non-accrual     Total 
     # of           # of           # of       
(Dollars in thousands)    Loans     Amount     Loans     Amount     Loans     Amount 

Construction to permanent

     1      $991       1      $1,197       2      $2,188  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Troubled Debt Restructurings

     1      $991       1      $1,197       2      $2,188  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Two loans, including a loan which had been modified in a prior year, were modified in a troubled debt restructuring during the three months ended March 31, 2014. The following table summarizes loans that were modified in a troubled debt restructuring during the three months ended March 31, 2014.

                                                                                                
     Three months ended March 31, 2014 
           Pre-Modification           Post-Modification 
     Number of     Outstanding Recorded     Number of     Outstanding Recorded 
(Dollars in thousands)    Relationships     Investment     Relationships     Investment 

Troubled Debt Restructurings

                

Commercial Real Estate

     2      $2,439       2      $2,430  
    

 

 

     

 

 

     

 

 

     

 

 

 

Total Troubled Debt Restructurings

     2      $2,439       2      $2,430  
    

 

 

     

 

 

     

 

 

     

 

 

 

Substantially all of our troubled debt restructured loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate, an extension of the term of the loan, or a combination of these two methods. These modifications rarely result in the forgiveness of principal or accrued interest. In addition, we frequently obtain additional collateral or guarantor support when modifying commercial loans. If the borrower had demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

All troubled debt restructurings are impaired loans, which are individually evaluated for impairment.

Note 4: Deposits

The following table is a summary of the Company’s deposits at:

                                                
     March 31,     December 31, 
(in thousands)    2014     2013 

Non-interest bearing

    $57,967      $55,358  
    

 

 

     

 

 

 

Interest bearing

        

NOW

     25,464       28,618  

Savings

     86,409       80,983  

Money market

     29,502       29,310  

Time certificates, less than $100,000

     121,955       129,548  

Time certificates, $100,000 or more

     106,672       106,387  
    

 

 

     

 

 

 

Total interest bearing

     370,002       374,846  
    

 

 

     

 

 

 

Total Deposits

    $427,969      $430,204  
    

 

 

     

 

 

 

Note 5: Share-Based CompensationItem 1:    Legal Proceedings

The Company maintains the Patriot National Bancorp, Inc. 2012 Stock Plan to provide an incentive to directors and employees of the Company by the grant of options, restricted stock awards or phantom stock units. The Plan provides for the issuance of up to 3,000,000 shares of the Company’s common stock subject to certain Plan limitations. 2,240,268 shares of stock remain available for issuance under the Plan as of March 31, 2014. The vesting of restricted stock awards and options may be accelerated in accordance with terms of the plan. The Compensation Committee shall make terms and conditions applicable to the vesting of restricted stock awards and stock options. Restricted stock grants are available to directors and employees and vest in quarterly or annual installments over a three, four or five year period from the date of grant. The Compensation Committee accelerated the vesting of the initial grant of restricted stock in 2012, whereby the first year of the tranche vested immediately. The Company is expensing the grant date fair value of all share-based compensation over the requisite vesting periods on a straight-line basis.51

During the three months ended March 31, 2014 and March 31, 2013, the Company recorded $59,000 and $7,000 of total stock-based compensation, respectively. During the quarter ended March 31, 2014, there were 347,484 awards granted under the 2012 Stock Plan.Item 1A: Risk Factors

51

The following is a summary of the status of the Company’s restricted shares as of March 31, 2014, and changes therein during the period then ended.

                                                
     Number of
Shares
Awarded
     Weighted
Average Grant
Date Fair Value
 

Non-vested at December 31, 2013

     281,835      $1.26  

Granted

     347,484       1.01  

Vested

     4,435       1.73  
    

 

 

     

Non-vested at March 31, 2014

     624,884      $1.12  
    

 

 

     

Expected future stock award expense related to the non-vested restricted awards as of March 31, 2014, is $648,000 over an average period of 2.8 years.

The company had no outstanding stock options at March 31, 2014.

Note 6: Income Taxes

The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. The deferred tax position has been affected by several significant transactions in prior years. These transactions include provision for loan losses, the levels of non-accrual loans and other-than-temporary impairment write-offs of certain investments, as well as a loss on the bulk sale of loans in 2011. As a result, the Company was in a cumulative net loss position in 2011 and under the applicable accounting guidance, had concluded that it was not more-likely-than-not that the Company would be able to realize its deferred tax assets and, accordingly, had established a full valuation allowance totaling $14.4 million against the deferred tax asset balance remaining after the IRC 382 write-down (see below).

As measured under the rules of the Tax Reform Act of 1986, the Company has undergone a greater than 50% change of ownership in 2010. Consequently, use of the Company’s net operating loss carry forward and certain built in deductions available against future taxable income in any one year are limited. The maximum amount of carry forwards available in a given year is limited to the product of the Company’s fair market value on the date of ownership change and the federal long-term tax-exempt rate, plus any limited carry forward not utilized in prior years.

The Company analyzed the impact of its ownership change in 2010 and calculated the annual limitation under IRC 382 to be $284,000. Based on the analysis, the Company had determined that the pre-change net operating losses and net unrealized built-in deductions were approximately $36.2 million. Based on a 20 year carry forward period, the Company could utilize approximately $5.6 million of the pre-change net operating losses and built-in deductions. Therefore, the Company wrote-off approximately $10.4 million of deferred tax assets in 2011. Accordingly, the write-off of the deferred tax asset did not affect the consolidated financial statements as there was a full valuation allowance against the deferred tax asset.

Management has reviewed the deferred tax position of the Company at March 31, 2014. The valuation allowance is analyzed quarterly for changes affecting the deferred tax asset. At March 31, 2014, the company reported taxable income for the second consecutive quarter. However, based on current accounting guidance the Company has not generated taxable income for a sufficient length of time in order to reverse the DTA valuation allowance and, accordingly, had an allowance totaling $17.8 million at March 31, 2014. In the future, when the Company has generated taxable income on a more sustained basis, management’s conclusion regarding the need for a deferred tax asset valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation allowance.

Note 7: Income (loss) per share

The Company is required to present basic income (loss) per share and diluted income (loss) per share in its consolidated statements of operations. Basic income (loss) per share amounts are computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted income (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 stock options and are 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 income (loss) per share.

The stock options and non-vested restricted stock awards did not have an impact on the diluted earnings per share. The following is information about the computation of income (loss) per share for the three months ended March 31, 2014 and 2013:

                                                                        
         Weighted Average
Common Shares
O/S
       
Three months ended March 31, 2014    Net Income       Amount 

Basic and Diluted Income Per Share

          

Income attributable to common shareholders

    $319,000     38,493,189      $0.01  
    

 

 

   

 

 

     

 

 

 
Three months ended March 31, 2013    Net Loss   Weighted Average
Common Shares

O/S
     Amount 

Basic and Diluted Loss Per Share

          

Loss attributable to common shareholders

    $(1,957,000   38,435,597      $(0.05
    

 

 

   

 

 

     

 

 

 

Note 8: Other Comprehensive Income

Other comprehensive income, which is comprised solely of the change in unrealized gains and losses on available-for-sale securities, is as follows:

                                                                                                                                                
     Three Months Ended     Three Months Ended 
     March 31, 2014     March 31, 2013 
( in thousands)    Before Tax
Amount
     Tax Effect     Net of Tax
Amount
     Before Tax
Amount
     Tax Effect     Net of Tax
Amount
 

Unrealized holding gains arising during the period

    $393      $—        $393      $55      $—        $55  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Note 9: Financial Instruments with Off-Balance Sheet RiskItem 6:    Exhibits

In the normal course of business, the Company 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 the Company has in particular classes of financial instruments.51

The contractual amount of commitments to extend credit and standby letters of credit represent the total amount of potential accounting loss should: the contracts be fully drawn upon; the customers default; and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis. Management believes that the Company controls the credit risk of these financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of collateral as deemed necessary.SIGNATURES

Financial instruments whose contractual amounts represent credit risk at March 31, 2014 are as follows:53

 


PART I- FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

  

March 31, 2015

  

December 31, 2014

 
         

ASSETS

 

(in thousands, except shares and per share amounts)

 

Cash and due from banks:

        

Noninterest bearing deposits and cash

 $2,080  $2,095 

Interest bearing deposits

  63,878   71,163 

Total cash and cash equivalents

  65,958   73,258 
         

Securities:

        

Available for sale securities, at fair value (Note 2)

  32,738   33,682 

Other Investments

  4,450   4,450 

Federal Reserve Bank stock, at cost

  2,020   2,058 

Federal Home Loan Bank stock, at cost

  6,628   6,628 

Total securities

  45,836   46,818 
         

Loans receivable (net of allowance for loan losses: 2015: $5,193 2014: $4,924) (Note 3)

  494,166   471,984 

Accrued interest and dividends receivable

  1,974   1,918 

Premises and equipment, net

  23,056   22,357 

Deferred tax asset (Note 6)

  14,621   14,926 

Other assets

  1,495   1,363 

Total assets

 $647,106  $632,624 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Liabilities

        
         

Deposits (Note 4):

        

Noninterest bearing deposits

 $70,331  $63,398 

Interest bearing deposits

  386,776   379,635 

Total deposits

  457,107   443,033 

Federal Home Loan Bank borrowings

  120,000   120,000 

Junior subordinated debt owed to unconsolidated trust

  8,248   8,248 

Accrued expenses and other liabilities

  2,450   2,608 

Total liabilities

  587,805   573,889 
         

Commitments and Contingencies (Note 9)

        
         

Shareholders' equity (1) (Note 7)

        

Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding

  -   - 

Common stock, $.01 par value, 100,000,000 shares authorized; 2015: 3,955,119 shares issued;

        

3,953,949 shares outstanding. 2014 : 3,952,179 shares issued; 3,951,009 shares outstanding

  396   395 

Additional paid-in capital (Note 5)

  105,865   105,752 

Accumulated deficit

  (46,686)  (46,975)

Less: Treasury stock, at cost: 2015 and 2014, 1,170 shares

  (160)  (160)

Accumulated other comprehensive loss (Note 8)

  (114)  (277)

Total shareholders' equity

  59,301   58,735 
         

Total liabilities and shareholders' equity

 $647,106  $632,624 

See Accompanying Notes to Consolidated Financial Statements.

(1) All common stock data has been restated for a 1-for-10 reverse stock split which took effect on March 4, 2015.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

  

Three Months Ended March 31,

 
  

2015

  

2014

 
  (in thousands, except per share amounts) 

Interest and Dividend Income

        

Interest and fees on loans

 $5,546  $4,691 

Interest on investment securities

  116   135 

Dividends on investment securities

  57   41 

Other interest income

  29   12 

Total interest and dividend income

  5,748   4,879 
         

Interest Expense

        

Interest on deposits

  529   637 

Interest on Federal Home Loan Bank borrowings

  71   33 

Interest on subordinated debt

  71   200 

Total interest expense

  671   870 
         

Net interest income

  5,077   4,009 
         

Provision for Loan Losses

  250   - 
         

Net interest income after provision for loan losses

  4,827   4,009 
         

Non-Interest Income

        

Loan application, inspection & processing fees

  50   66 

Fees and service charges

  174   219 

Earnings on cash surrender value of life insurance

  -   121 

Other income

  170   187 

Total non-interest income

  394   593 
         

Non-Interest Expense

        

Salaries and benefits

  2,344   1,971 

Occupancy and equipment expense

  955   922 

Data processing expense

  250   250 

Advertising and promotional expenses

  50   51 

Professional and other outside services

  569   471 

Loan administration and processing expenses

  22   17 

Regulatory assessments

  154   230 

Insurance expense

  81   97 

Other real estate operations

  -   16 

Material and communications

  81   93 

Other operating expenses

  225   165 

Total non-interest expense

  4,731   4,283 
         

Income before income taxes

  490   319 
         

Provision for income taxes

  201   - 
         

Net income

 $289  $319 
         

Basic and diluted income per share (1)

 $0.07  $0.08 

 See Accompanying Notes to Consolidated Financial Statements.

(1) All common stock data has been restated for a 1-for-10 reverse stock split which took effect on March 4, 2015.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

  

Three Months Ended

 
  

March 31,

 
  

2015

  

2014

 
   (in thousands) 

Net income

 $289  $319 

Other comprehensive income:

        

Unrealized holding gains on available for sale securities arising during the period, net of taxes

  163   393 

Total comprehensive income

 $452  $712 

See Accompanying Notes to Consolidated Financial Statements.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands, except shares)

                 

Accumulated

     
      

Additional

          

Other

     
  

Common

  

Paid-In

  

Accumulated

  

Treasury

  

Comprehensive

     
  

Stock

  

Capital

  

Deficit

  

Stock

  

Income (Loss)

  

Total

 
                         

Three months ended March 31, 2015

                        
                         

Balance at December 31, 2014

 $395  $105,752  $(46,975) $(160) $(277) $58,735 
                         

Net income

  -   -   289   -   -   289 

Other comprehensive income

  -   -   -   -   163   163 
                         

Share-based compensation expense

  -   114   -   -   -   114 

Issuance of restricted stock

  1   (1)  -   -   -   - 

Balance, March 31, 2015

 $396  $105,865  $(46,686) $(160) $(114) $59,301 
                         

Three months ended March 31, 2014

                        
                         

Balance at December 31, 2013

 $388  $105,484  $(62,684) $(160) $(1,187) $41,841 
                         

Net Income

  -   -   319   -   -   319 

Other comprehensive income

  -   -   -   -   393   393 
                         

Share-based compensation expense

  -   59   -   -   -   59 

Issuance of restricted stock

  3   (3)  -   -   -   - 

Balance, March 31, 2014

 $391  $105,540  $(62,365) $(160) $(794) $42,612 

See Accompanying Notes to Consolidated Financial Statements.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

  

Three Months Ended

 
  

March 31,

 
  

2015

  

2014

 

Cash Flows from Operating Activities:

 

(in thousands)

 
         

Net income

 $289  $319 

Adjustments to reconcile net income to net cashprovided by operating activities:

        

Amortization of investment premiums

  58   66 

Amortization and accretion of purchase loan premiums and discounts, net

  127   18 

Provision for loan losses

  250   - 

Earnings on cash surrender value of life insurance

  -   (121)

Depreciation and amortization

  246   293 

Share-based compensation

  114   59 

Deferred income taxes

  201   - 

Changes in assets and liabilities:

        

Decrease (increase) in net deferred loan costs

  139   (13)

Increase in accrued interest and dividends receivable

  (56)  (12)

Increase in other assets

  (132)  (58)

Decrease in accrued expenses and other liabilities

  (158)  (296)

Net cash provided by operating activities

  1,078   255 
         

Cash Flows from Investing Activities:

        

Principal repayments on available for sale securities

  1,153   1,213 

Redemptions of Federal Reserve Bank stock

  38   - 

(Increase) decrease in loans

  (22,698)  3,020 

Purchase of other real estate owned

  -   (264)

Purchase of bank premises and equipment, net

  (945)  (98)

Net cash (used in) provided by investing activities

  (22,452)  3,871 
         

Cash Flows from Financing Activities:

        

Net increase (decrease) in deposits

  14,074   (2,235)

Increase in FHLB borrowings

  -   23,000 

Net cash provided by financing activities

  14,074   20,765 
         

Net (decrease) increase in cash and cash equivalents

  (7,300)  24,891 
         

Cash and Cash Equivalents:

        

Beginning

  73,258   34,866 
         

Ending

 $65,958  $59,757 


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (Unaudited)

  

Three Months Ended

 
  

March 31,

 
  

2015

  

2014

 
  

(in thousands)

 

Supplemental Disclosures of Cash Flow Information

        

Interest paid

 $586  $669 
         

Income taxes paid

 $3  $- 

See Accompanying Notes to Consolidated Financial Statements.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 1:Basis of Financial Statement Presentation

The Consolidated Balance Sheet at December 31, 2014 has been derived from the audited financial statements of Patriot National Bancorp, Inc. (“Bancorp” or the “Company”) at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The accompanying unaudited financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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 have been omitted. The accompanying consolidated financial statements and related notes should be read in conjunction with the previously filed audited financial statements of Bancorp and notes thereto for the year ended December 31, 2014.

The information furnished reflects, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results of operations that may be expected for the remainder of 2015.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

                        
     (in thousands) 

Commitments to extend credit:

    

Future loan commitments

    $15,526  

Home equity lines of credit

     27,708  

Unused lines of credit

     36,871  

Undisbursed construction loans

     2,174  

Financial standby letters of credit

     1,118  
    

 

 

 
    $83,397  
    

 

 

 

Standby letters of credit are written commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded on the Company’s consolidated balance sheet at their fair value at inception.

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 by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include residential and commercial property, deposits and securities. The bank has established a reserve of $12,000 as of March 31, 2014.

Note 10: Regulatory and Operational Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). In addition, due to the Bank’s asset profile and current economic conditions in its markets, the Bank’s capital plan pursuant to the Agreement described below does target a minimum 9% Tier 1 leverage capital ratio.

In February 2009 the Bank entered into a formal written agreement (the “Agreement”) with the Office of the Comptroller of the Currency. Under the terms of the Agreement, the Bank has appointed a Compliance Committee of outside directors and the Chief Executive Officer. The Committee must report quarterly to the Board of Directors and to the OCC on the Bank’s progress in complying with the Agreement. The Agreement requires the Bank to review, adopt and implement a number of policies and programs related to credit and operational issues. The Agreement further provides for limitations on the acceptance of certain brokered deposits and the extension of credit to borrowers whose loans are criticized. The Bank may pay dividends during the term of the Agreement only with prior written permission from the OCC. The Agreement also requires that the Bank develop and implement a three-year capital plan. The Bank has taken or put into process all of the steps required by the Agreement, and does not anticipate that the restrictions included within the Agreement will impair its current business plan.

In June 2010 the company entered into a formal written agreement (the “Reserve Bank Agreement”) with the Federal Reserve Bank of New York (the “Reserve Bank”). Under the terms of the Reserve Bank Agreement, the Board of Directors of the Company are required to take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank including taking steps to insure that the Bank complies with the Agreement with the OCC. The Reserve Bank Agreement requires the Company to submit, adopt and implement a capital plan that is acceptable to the Reserve Bank. The Company must also report to the Reserve Bank quarterly on the Company’s progress in complying with the Reserve Bank Agreement. The Agreement further provides for certain restrictions on the payment or receipt of dividends, distributions of interest or principal on subordinate debentures or trust preferred securities and the Company’s ability to incur debt or to purchase or redeem its stock without the prior written approval of the Reserve Bank. The Company has taken or put into process all of the steps required by the Reserve Bank Agreement, and does not anticipate that the restrictions included within the Reserve Bank Agreement will impair its current business plan.

The Company’s and the Bank’s actual capital amounts and ratios at March 31, 2014 and December 31, 2013 were:

                                                                                                                                                
     Actual  For Capital
Adequacy Purposes
  To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
(Dollars in thousands)    Amount     Ratio  Amount     Ratio  Amount     Ratio 

March 31, 2014

                  

The Company:

                  

Total Capital (to Risk Weighted Assets)

    $56,405       14.12 $31,952       8.00  N/A       N/A  

Tier 1 Capital (to Risk Weighted Assets)

     51,406       12.87  15,976       4.00  N/A       N/A  

Tier 1 Capital (to Average Assets)

     51,406       9.56  21,507       4.00  N/A       N/A  

The Bank:

                  

Total Capital (to Risk Weighted Assets)

    $56,342       14.12 $31,919       8.00 $39,898       10.00

Tier 1 Capital (to Risk Weighted Assets)

     51,349       12.87  15,959       4.00  23,939       6.00

Tier 1 Capital (to Average Assets)

     51,349       9.56  21,491       4.00  26,864       5.00

December 31, 2013

                  

The Company:

                  

Total Capital (to Risk Weighted Assets)

    $56,060       13.95 $32,153       8.00  N/A       N/A  

Tier 1 Capital (to Risk Weighted Assets)

     51,027       12.70  16,076       4.00  N/A       N/A  

Tier 1 Capital (to Average Assets)

     51,027       9.33  21,888       4.00  N/A       N/A  

The Bank:

                  

Total Capital (to Risk Weighted Assets)

    $55,758       13.86 $32,153       8.00 $32,187       10.00

Tier 1 Capital (to Risk Weighted Assets)

     50,730       12.61  16,076       4.00  24,140       6.00

Tier 1 Capital (to Average Assets)

     50,730       9.28  21,888       4.00  27,340       5.00

Restrictions on dividends, loans and advances

The Company’s ability to pay dividends is dependent on the Bank’s ability to pay dividends to the Company. Pursuant to the February 9, 2009 Agreement between the Bank and the OCC, the Bank can pay dividends to the Company only pursuant to a dividend policy requiring compliance with the Bank’s OCC-approved capital program, in compliance with applicable law and with the prior written determination of no supervisory objection by the Assistant Deputy Comptroller. In addition to the Agreement, certain other restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of the OCC is required to pay dividends in excess of the Bank’s earnings retained in the current year plus retained net earnings for the preceding two years. As of March 31, 2014, the Bank had an accumulated deficit; therefore, dividends may not be paid to the Company. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.

The Company’s ability to pay dividends and incur debt is also restricted by the Reserve Bank Agreement. Under the terms of the Reserve Bank Agreement, the Company has agreed that it shall not declare or pay any dividends or incur, increase or guarantee any debt without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation (the “Director”) of the Board of Governors.

Loans or advances to the Company from the Bank are limited to 10% of the Bank’s capital stock and surplus on a secured basis.

Recent Legislative Developments

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”) was signed into law on July 21, 2010. The Act is a significant piece of legislation that continues to have a major impact on the financial services industry, including the organization, financial condition and operations of banks and bank holding companies. Management continues to evaluate the impact of the Act; however, uncertainty remains as to its operational impact, which could have a material adverse impact on the Company’s business, results of operations and financial condition. Many of the provisions of the Act are aimed at financial institutions that are significantly larger than the Company and the Bank. Notwithstanding this, there are many other provisions that the Company and the Bank are subject to and will have to comply with, including any new rules applicable to the Company and the Bank promulgated by the Bureau of Consumer Financial Protection, a new regulatory body dedicated to consumer protection. As rules and regulations are promulgated by the agencies responsible for implementing and enforcing the Act, the Company and the Bank will have to address each to ensure compliance with applicable provisions of the Act and compliance costs are expected to increase.

The Dodd-Frank Act broadens the base for Federal Deposit Insurance Corporation insurance assessments. Under rules issued by the FDIC in February 2011, the base for insurance assessments changed from domestic deposits to consolidated assets less tangible equity. Assessment rates are calculated using formulas that take into account the risks of the institution being assessed. The rule was effective beginning April 1, 2011. This did not have a material impact on the Company.

On June 28, 2011, the Federal Reserve Board approved a final debit-card interchange rule. This primarily impacts larger banks and has not had a material impact on the Company.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on the Company. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. Management will have to apply resources to ensure compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

Note 2:Investment Securities

The amortized cost, gross unrealized losses and approximate fair values of available-for-sale securities at March 31, 2015 and December 31, 2014 are as follows:

      

Gross

     

(in thousands)

 

Amortized

  

Unrealized

  

Fair

 
  

Cost

  

Losses

  

Value

 

March 31, 2015:

            
             

U.S. Government agency bonds

 $7,500  $(4 $7,496 

U. S. Government agency mortgage-backed securities

  16,424   (148)  16,276 

Corporate bonds

  9,000   (34  8,966 
  $32,924  $(186 $32,738 
             
             

December 31, 2014:

            
             

U. S. Government agency bonds

 $7,500  $(91 $7,409 

U. S. Government agency mortgage-backed securities

  17,635   (298  17,337 

Corporate bonds

  9,000   (64  8,936 
  $34,135  $(453 $33,682 

There were no purchases or sales of available-for-sale securities in 2014 and 2015.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following table presents the gross unrealized loss and fair value of Bancorp’s available-for-sale securities, aggregated by the length of time the individual securities have been in a continuous loss position, at March 31, 2015 and December 31, 2014:

  

Less Than 12 Months

  

12 Months or More

  

Total

 

(in thousands)

 

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

 

March 31, 2015:

                        
                         

U.S. Government agency bonds

 $4,996  $(4) $-  $-  $4,996  $(4)

U. S. Government agency mortgage - backed securities

  3,460   (11)  12,816   (137)  16,276   (148)

Corporate bonds

  -   -   8,966   (34)  8,966   (34)

Totals

 $8,456  $(15) $21,782  $(171) $30,238  $(186)
                         

December 31, 2014:

                        
                         

U. S. Government agency bonds

 $-  $-  $7,409  $(91) $7,409  $(91)

U. S. Government agency mortgage - backed securities

  -   -   17,337   (298)  17,337   (298)

Corporate bonds

  -   -   8,936   (64)  8,936   (64)

Totals

 $-  $-  $33,682  $(453) $33,682  $(453)

At March 31, 2015, ten of eleven available-for-sale securities had unrealized holding losses with aggregate depreciation of 0.6% from the amortized cost. At December 31, 2014, all eleven securities had unrealized losses with aggregate depreciation of 1.3% from the amortized cost.

Bancorp performs a quarterly analysis of those securities that are in an unrealized loss position to determine if those losses qualify as other-than-temporary impairments. This analysis considers the following criteria in its determination: the ability of the issuer to meet its obligations, management’s plans and ability to maintain its investment in the security, the length of time and the amount by which the security has been in a loss position, the interest rate environment, the general economic environment and prospects or projections for improvement or deterioration.

Management believes that none of the unrealized losses on available-for-sale securities noted above are other than temporary due to the fact that they relate to market interest rate changes on U.S. Government agency debt, corporate debt and mortgage-backed securities issued by U.S. Government agencies. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade and the Company expects to receive all contractual principal and interest related to these investments. Because the Company does not intend to sell the investments, and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The amortized cost and fair value of available-for-sale debt securities at March 31, 2015 by contractual maturity are presented below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be prepaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following summary:

          

Gross

 

(in thousands)

         

Unrealized

 
  

Amortized Cost

  

Fair Value

  

Losses

 

Maturity:

            

Corporate bonds 5 to 10 years

 $9,000  $8,966  $(34)

U.S. Government agency bonds < 5 years

  2,500   2,500   - 

U.S. Government agency bonds 5 to 10 years

  5,000   4,996   (4)

U.S. Government agency mortgage-backed securities

  16,424   16,276   (148)

Total

 $32,924  $32,738  $(186)

At March 31, 2015 and December 31, 2014, securities of $6.8 million and $7.4 million were pledged with the Federal Reserve Bank of New York to secure municipal deposits.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 11: Fair Value3: Loans Receivable and Interest Rate RiskAllowance for Loan Losses

A summary of the Company’s loan portfolio at March 31, 2015 and December 31, 2014 is as follows:

(in thousands)

 

March 31,

  

December 31,

 
  

2015

  

2014

 

Commercial

 52,476  53,973 

Commercial Real Estate

  281,387   254,505 

Construction

  7,024   3,096 

Construction to permanent

  9,988   10,627 

Residential

  102,521   108,543 

Consumer

  45,963   46,164 

Total Loans

  499,359   476,908 

Allowance for loan losses

  (5,193)  (4,924)

Loans receivable, net

 $494,166  $471,984 

The Company's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York. The Company originates commercial real estate loans, commercial business loans, construction loans and a variety of consumer loans. In addition, the Company previously had originated loans on residential real estate. All residential and commercial mortgage 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 uponthe 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.

The Company used fair value measurementshas established credit policies applicable to record fair value adjustmentseach type of lending activity in which it engages, evaluates the creditworthiness of each customer and, in most cases, extends credit of up to certain assets and liabilities and to determine fair value disclosures. A description75% of the valuation methodologiesmarket value of the collateral for commercial real estate at the date of the credit extension depending on the Company's evaluation of the borrowers' creditworthiness and type of collateral and up to 80% for multi–family real estate. In the case of construction loans, the maximum loan-to-value is 75% of the “as completed” appraised value. The appraised value of collateral is monitored on an ongoing basis and additional collateral is requested when warranted. Real estate is the primary form of collateral. Other important forms of collateral are accounts receivable, inventory, other business assets, marketable securities and time deposits.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

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

Commercial Real Estate Loans –In underwriting commercial real estate loans, the Company 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 there be a substantial decline in the value of the property securing the loan or decline in general economic conditions. Where the owner occupies the property, the Company also evaluates the business ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignments and/or the guarantee of the operating company when the property is owner occupied.

Commercial and Industrial Loans– The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are usually made to finance accounts receivable, the purchase of inventory or new or used for assets and liabilities recorded at fair value,equipment and for estimating fair valueother 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 this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees when obtained, as a secondary source. Payments on such loans are often dependent upon the successful operation of the underlying business. Repayment of such loans may therefore be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower or loss of market share for financial and non-financial instruments not recorded at fair value, is set forth below.

Cash and due from banks, federal funds sold, short-term investments and accrued interest receivable and payable: The carrying amount is a reasonable estimate of fair value. These financial instruments are not recorded at fair value on a recurring basis.the borrower’s products or services.

Available-for-Sale Securities:Residential Real Estate Loans These– Home equity loans secured by real estate properties are offered by the Company. The Company no longer offers residential mortgages, having exited this business in 2013. Repayment of residential real estate loans may be negatively impacted should the borrower have financial instruments are recorded at fair valuedifficulties, should there be a significant decline in the financial statements. Where quoted prices are available in an active market, securities are classified within Level 1value of the valuation hierarchy. If quoted pricesproperty securing the loan or should there be a decline in general economic conditions.

Construction Loans– Construction loans are not available, then fair valuesshort-term loans (generally up to 18 months) secured by land for either residential or commercial development. The loans are estimatedgenerally made for acquisition and improvements. Funds are disbursed as phases of construction are completed. Construction loans are generally personally guaranteed by using pricing models (i.e., matrix pricing)the principal(s). Repayment of such loans may be negatively impacted by the builders’ inability to complete construction, by a downturn in the new construction market, by a significant increase in interest rates or quoted pricesby a decline in general economic conditions.

Other/Consumer Loans– The Company also offers installment loans, credit cards, consumer overdraft and home equity lines of securities with similar characteristics andcredit to individuals.  Repayments of such loans are classified within Level 2often dependent on the personal income of the valuation hierarchy. Examples of such instruments include U.S. government agency bonds and mortgage-backed securities, corporate bonds and money market preferred equity securities. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricings. The fair value measurements considered observable databorrower which may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the data and assumptions usedbe negatively impacted by adverse changes in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data. Level 3 securities are instruments for which significant unobservable input are utilized. Available-for-sale securities are recorded at fair value on a recurring basis.

Loans:For variable rate loans, which reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using the period end rates, estimated by using local market data, at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios.economic conditions. The Company does not record loans at fair valueplace a high emphasis on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired loans are recorded to reflect partial write-downs based on the observable market price or current appraised valueoriginating these types of collateral. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Other Real Estate Owned: The fair value of the Company’s OREO properties is based on the estimated current property valuations less estimated selling costs. When the fair value is based on current observable appraised values, OREO is classified within Level 2. The Company classifies the OREO within Level 3 when unobservable adjustments are made to appraised values. The Company does not record other real estate owned at fair value on a recurring basis.have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

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,Notes to a schedule of aggregated expected maturities on such deposits. The Company does not record deposits at fair value on a recurring basis.consolidated financial statements (Unaudited)

Short-term borrowings: The carrying amounts of borrowings under short-term repurchase agreements and other short-term borrowings maturing within 90 days approximate their fair values. The Company does not record short-term borrowings at fair value on a recurring basis.

Junior Subordinated Debt:Junior subordinated debt reprices quarterly and as a result the carrying amount is considered a reasonable estimate of fair value. The Company does not record junior subordinated debt at fair value on a recurring basis.

Federal Home Loan Bank Borrowings: The fair value of the advances is estimated using a discounted cash flow calculation that applies current Federal Home Loan Bank interest rates for advances of similar maturity to a schedule of maturities of such advances. The Company does not record these borrowings at fair value on a recurring basis.

Other Borrowings: The fair values of longer term borrowings and fixed rate repurchase agreements are estimated using a discounted cash flow calculation that applies current interest rates for transactions of similar maturity to a schedule of maturities of such transactions. The Company does not record these borrowings at fair value on a recurring basis.

Off-balance sheet instruments: Fair values for the Company’s off-balance-sheet instruments (lending commitments) 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 Company does not record its off-balance-sheet instruments at fair value on a recurring basis.

The following table detailssets forth activity in our allowance for loan losses, by loan type, for the financial assets measured at fair value on a recurring basis as ofthree months ended March 31, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine fair value:

(in thousands)  Quoted Prices in
Active Markets
for Identical Assets

(Level 1)
   Significant
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Balance
as of
March 31, 2014
 

March 31, 2014

        

U.S. Government agency mortgage- backed securities

  $—      $20,632    $—      $20,632  

U.S. Government agency bonds

   —       7,245     —       7,245  

Corporate bonds

   —       8,938     —       8,938  
  

 

 

   

 

 

   

 

 

   

 

 

 

Securities available for sale

  $—      $36,815    $—      $36,815  
  

 

 

   

 

 

   

 

 

   

 

 

 
   Quoted Prices in
Active Markets

for Identical Assets
(Level 1)
   Significant
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Balance
as of
December 31, 2013
 

December 31, 2013

        

U.S. Government agency mortgage- backed securities

  $—      $21,752    $—      $21,752  

U.S. Government agency bonds

     7,079       7,079  

Corporate bonds

   —       8,870     —       8,870  
  

 

 

   

 

 

   

 

 

   

 

 

 

Securities available for sale

  $—      $37,701    $—      $37,701  
  

 

 

   

 

 

   

 

 

   

 

 

 

There were no transfers of assets between levels 1, 2 or 3 as of March 31, 2014 or December 31, 2013. Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

2015. The following tables reflect financial assets measured at fair value on a non-recurring basis as of March 31, 2014 and December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

                                                                                                
(in thousands)    Quoted Prices in
Active Markets

for Identical Assets
(Level 1)
     Significant
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
   Balance 

March 31, 2014

              

Impaired Loans(1)

    $—        $—        $6,855    $6,855  
    

 

 

     

 

 

     

 

 

   

 

 

 

Other real estate owned(2)

    $ —        $—        $264    $264  
    

 

 

     

 

 

     

 

 

   

 

 

 

December 31, 2013

              

Impaired Loans(1)

    $—        $—        $7,508    $7,508  
    

 

 

     

 

 

     

 

 

   

 

 

 

Other real estate owned(2)

    $—        $—        $—      $—    
    

 

 

     

 

 

     

 

 

   

 

 

 

(1)

Represents carrying value for which adjustments are based on the appraised value of the collateral.

(2)

Represents carrying value for which adjustments are based on the appraised value of the property.

The Company 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 represent the underlying value of the Company.

The estimated fair value amounts have been measured as of March 31, 2014 and December 31, 2013 and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair value of these financial instruments subsequent to the respective reporting dates may be different than amounts reported on those dates.

The information presented should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other bank holding companies may not be meaningful.

The following is a summary of the carrying amounts and estimated fair values of the Company’s financial instruments not measured and not reported at fair value on the consolidated balance sheets at March 31, 2014 and December 31, 2013 (in thousands):

                                                                                                                        
      March 31, 2014     December 31, 2013 
(in thousands)    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      $1,503      $1,503      $1,570      $1,570  

Interest-bearing deposits due from banks

     Level 1       58,254       58,254       33,295       33,295  

Other investments

     Level 2       4,450       4,450       4,450       4,450  

Federal Reserve Bank stock

     Level 1       1,444       1,444       1,444       1,444  

Federal Home Loan Bank stock

     Level 1       4,143       4,143       4,143       4,143  

Loans receivable, net

     Level 3       415,123       420,486       418,148       424,831  

Accrued interest receivable

     Level 1       1,578       1,578       1,566       1,566  

Financial Liabilities:

                    

Demand deposits

     Level 1      $57,967      $57,967      $55,358      $55,358  

Savings deposits

     Level 1       86,409       86,409       80,983       80,983  

Money market deposits

     Level 1       29,502       29,502       29,310       29,310  

NOW accounts

     Level 1       25,464       25,464       28,618       28,618  

Time deposits

     Level 2       228,627       229,231       235,935       236,602  

FHLB Borrowings

     Level 2       80,000       80,000       57,000       57,000  

Subordinated debentures

     Level 2       8,248       8,248       8,248       8,248  

Accrued interest payable

     Level 1       1,589       1,589       1,388       1,388  

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Off-balance sheet instruments

Loan commitments on which the committed interest rate is less than the current market rate were insignificant at March 31, 2014 and December 31, 2013. The estimated fair value of fee income on letters of credit at March 31, 2014 and December 31, 2013 was insignificant.

Note 12: Recent Accounting Pronouncements

ASU No. 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,”requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. ASU No. 2013-12 is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted this guidance on January 1, 2013 and it did not have a material impact on the consolidated financial statements.

Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurements (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” was issued as a result of the effort to develop common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). While ASU No. 2011-04 is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands the existing disclosure requirements for fair value measurements and clarifies the existing guidance or wording changes to align with IFRS No. 13. Many of the requirements for the amendments in ASU No. 2011-04 do not result in a change in the application of the requirements in Topic 820. The Company adopted ASU No. 2011-04 on January 1, 2012 and it did not have a material impact on the consolidated financial statements.

ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income,” requires an entity to present components of comprehensive income either in a single continuous statement of comprehensive income or in two separate consecutive statements. These amendments made the financial statement presentation of other comprehensive income more prominent by eliminating the alternative to present comprehensive income within the statement of equity. As originally issued, ASU No. 2011-05 required entities to present reclassification adjustments out of accumulated other comprehensive income by component in the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). This requirement was deferred byASU No. 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards”.ASU No. 2011-05 is effective for all interim and annual periods beginning on or after December 15, 2011. The Company adopted this guidance in the first quarter of 2012 and elected to present comprehensive income in a separate consolidated statement of comprehensive income.

ASU 2014-01: Accounting for Investments in Qualified Affordable Housing Projects (Topic 323) allows an entity that invests in low income housing projects and meets all the specified conditions to use the proportional amortization method to account for the costs of those investments. The effective date is for annual periods and interim periods within those annual periods beginning after December 15, 2014. The company is in the process of evaluating the impact of ASU 2014-01 on its financial statement and processes.

In January 2014, the FASB issued ASU 2014-04,“ Receivables – Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure, “to clarify that when an in substance repossession or foreclosure occurs, a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1)table also details the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate propertyreceivable that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-04 is effectiveevaluated individually, and collectively, for annual reporting periods beginning after December 15, 2014. The company is in the process of evaluating the impact of ASU 2014-04 on its financial statements and processes.

Item 2:Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Certain statements contained in Bancorp’s public reports, including this report, and in particular in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may be forward looking and subject to a variety of risks and uncertainties. These factors include, but are not limited to; (1) changes in prevailing interest rates which would affect the interest earned on Bancorp’s interest earning assetsimpairment, and the interest paid on its interest bearing liabilities; (2) the timingrelated portion of repricing of Bancorp’s interest earning assets and interest bearing liabilities; (3) the effect of changes in governmental monetary policy; (4) the effect of changes in regulations applicable to Bancorp and the Bank and the conduct of its business; (5) changes in competition among financial service companies, including possible further encroachment of non-banks on services traditionally provided by banks; (6) the ability of competitors that are larger than Bancorp to provide products and services which it is impracticable for Bancorp to provide; (7) the state of the economy and real estate values in Bancorp’s market areas, and the consequent effect on the quality of Bancorp’s loans, customers, vendors and communities; (8) recent governmental initiatives that are expected to have a profound effect on the financial services industry and could dramatically change the competitive environment of Bancorp; (9) other legislative or regulatory changes, including those related to residential mortgages, changes in accounting standards, and Federal Deposit Insurance Corporation (“FDIC”) premiums that may adversely affect Bancorp.

Although Bancorp believes that it offers the loan and deposit products and has the resources needed for continued success, future revenues and interest spreads and yields cannot be reliably predicted. These trends may cause Bancorp to adjust its operations in the future. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results or stock prices.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified the accounting for the allowance for loan losses that is allocated to each loan portfolio segment.

(in thousands)

                                

Three months endedMarch 31, 2015

 

Commercial

  

Commercial Real Estate

  

Construction

  

Construction

to Permanent

  

Residential

  

Consumer

  

Unallocated

  

Total

 

Allowance for loan losses:

                                

Beginning Balance

 $1,918  $1,419  $63  $215  $831  $478  $-  $4,924 

Charge-offs

  -   -   -   -   (3)  (7)  -   (10)

Recoveries

  16   -   -   5   -   8   -   29 

Provision

  (637)  605   159   (29)  (98)  232   18   250 

Ending Balance

 $1,297  $2,024  $222  $191  $730  $711  $18  $5,193 

Ending balance: individuallyevaluated for impairment

 $-  $-  $-  $-  $-  $-  $-  $- 

Ending balance: collectivelyevaluated for impairment

  1,297   2,024   222   191   730   711   18   5,193 
                                 

Total Allowance for Loan Losses

 $1,297  $2,024  $222  $191  $730  $711  $18  $5,193 
                                 
March 31, 2015                                

Total Loans ending balance

 $52,476  $281,387  $7,024  $9,988  $102,521  $45,963  $-  $499,359 
                                 
                                 

Ending balance: individuallyevaluated for impairment

 $-  $8,272  $-  $-  $3,406  $552  $-  $12,230 
                                 
                                 

Ending balance: collectivelyevaluated for impairment

 $52,476  $273,115  $7,024  $9,988  $99,115  $45,411  $-  $487,129 


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following table sets forth activity in our allowance for loan losses, by loan type, for the analysisthree months ended March 31, 2014. The following table also details the amount of loans receivable that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment.

(in thousands)

                                

Three months ended March 31, 2014

 

Commercial

  

Commercial Real Estate

  

Construction

  

Construction

to Permanent

  

Residential

  

Consumer

  

Unallocated

  

Total

 

Allowance for loan losses:

                                

Beginning Balance

 $2,285  $1,585  $260  $25  $795  $534  $197  $5,681 

Charge-offs

  (9)  -   -   -   (178)  (30)  -   (217)

Recoveries

  -   -   -   -   15   1   -   16 

Provision

  95   (265)  -   9   72   34   55  $- 

Ending Balance

 $2,371  $1,320  $260  $34  $704  $539  $252  $5,480 

Ending balance: individuallyevaluated for impairment

 $1,500  $17  $260  $-  $21  $2  $-  $1,800 

Ending balance: collectivelyevaluated for impairment

  871   1,303   -   34   683   537   252   3,680 
                                 

Total Allowance for Loan Losses

 $2,371  $1,320  $260  $34  $704  $539  $252  $5,480 
                                 
March 31, 2014                                

Total Loans ending balance

 $38,838  $217,674  $260  $12,718  $103,766  $47,347  $-  $420,603 
                                 
                                 

Ending balance: individuallyevaluated for impairment

 $6,052  $8,855  $260  $-  $5,192  $588  $-  $20,947 
                                 
                                 

Ending balance: collectivelyevaluated for impairment

 $32,786  $208,819  $-  $12,718  $98,574  $46,759  $-  $399,656 


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following table details for the year ended December 31, 2014 the amount of loans receivable that were evaluated individually, and collectively, for impairment, and the related portion of the allowance for the loans losses that was allocated to each loan portfolio segment:

(in thousands)

                            

December 31, 2014

 

Commercial

  

Commercial Real Estate

  

Construction

  

Construction to Permanent

  

Residential

  

Consumer

  

Total

 

Ending balance: individuallyevaluated for impairment

 $-  $-  $-  $-  $-  $7  $7 

Ending balance: collectivelyevaluated for impairment

  1,918   1,419   63   215   831   471   4,917 
                             

Total Allowance for Loan Losses

 $1,918  $1,419  $63  $215  $831  $478  $4,924 
                             
                             

Total Loans ending balance

 $53,973  $254,505  $3,096  $10,627  $108,543  $46,164  $476,908 
                             

Ending balance: individuallyevaluated for impairment

  2   7,398   -   -   3,764   560   11,724 
                             

Ending balance: collectivelyevaluated for impairment

 $53,971  $247,107  $3,096  $10,627  $104,779  $45,604  $465,184 

The Company monitors the credit quality of its investment securitiesloans receivable in an ongoing manner. Credit quality is monitored by reviewing certain credit quality indicators and trends, including but not limited to, loan to value ratios, debt service coverage ratios, debt to worth ratios, profitability ratios, cash flows, and credit scores.

Appraisals on properties securing non-performing loans and Other Real Estate Owned (“OREO”) are updated annually. We update our impairment analysis monthly based on the valuationmost recent appraisal as well as other factors (such as senior lien positions, property taxes, etc.).

The majority of deferred income tax assets,the Company’s impaired loans have been resolved through courses of action other than via liquidations of real estate collateral through OREO. These include normal loan payoffs, the traditional workout process, triggering personal guarantee obligations, and troubled debt restructurings. However, as Bancorp’s most critical accounting policiesloan workout efforts progress to a point where the bank’s liquidation of real estate collateral is the likely outcome, the impairment analysis is updated to reflect actual recent experience with bank sales of OREO properties.

A disposition discount is built into our impairment analysis and estimatesreflected in that they are importantour allowance once a property is determined to be a likely OREO (e.g. foreclosure is probable). To determine the discount we compare the average sales prices of our prior OREO properties to the portrayalappraised value that was obtained as of Bancorp’sthe date when we took title to the property. The difference is the bank-owned disposition discount.

The Company has a risk rating system as part of the risk assessment of its loan portfolio. The Company’s lending officers are required to assign a risk rating to each loan in their portfolio at origination, which is ratified or modified by the Committee to which the loan is submitted for approval. When the lender learns of important financial developments, the risk rating is reviewed and adjusted if necessary. Similarly, the Loan Committee can adjust a risk rating. The Company employs a system to ensure an independent review of the ratings annually for commercial credits over $250,000.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The Company uses an independent third party loan reviewer who performs quarterly reviews of a sample of loans, validating the Bank’s risk ratings assigned to such loans. Any upgrades to classified loans must be approved by the Management 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:

An asset is considered “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 the deficiencies are not corrected.

●   Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”

Charge–off generally commences after the loan is classified “doubtful” to reduce the loan to its recoverable balance. If the account is classified as “loss”, the full balance is charged off regardless of the potential recovery from the sale of the collateral. That amount is recognized as a recovery after the collateral is sold.

In accordance with FFIEC (“Federal Financial Institutions Examination Council”) published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” credits are charged-off when 180 days delinquent and “Closed-end” credits are charged-off when 120 days delinquent.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition and results of operations. They require management’s most subjective and complex judgment as a result of the need to make an estimate aboutborrowers. The unpaid principal balances of loans on nonaccrual status and considered impaired were $515,000 at March 31, 2015 and $866,000 at December 31, 2014. If non-accrual loans had been performing in accordance with their contractual terms, the effectCompany would have recorded approximately $4,000 of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis.

Summary

Bancorp reported netadditional income of $319,000 ($0.01 basic and diluted income per share) forduring the quarter ended March 31, 2014, compared to net loss of $2.0 million ($0.05 basic2015 and diluted loss per share) for$33,000 during the quarter ended March 31, 2013. 2014.

The primary reason forfollowing table sets forth the increasedetail, and delinquency status, of non-accrual loans at March 31, 2015 :

(in thousands)

 

Non-Accrual Loans

     
                         

2015

 
 

31-60 Days

Past Due

  

61-90 Days Past Due

  

Greater Than 90 Days

  

Total Past Due

  

Current

  

Total Non-Accrual Loans

 

Commercial Real Estate Substandard

 $-  $-  $-  $-  $135  $135 

Total Commercial Real Estate

 $-  $-  $-  $-  $135  $135 

Residential Real Estate Substandard

 $-  $-  $380  $380  $-  $380 

Total Residential Real Estate

 $-  $-  $380  $380  $-  $380 
                         

Total

 $-  $-  $380  $380  $135  $515 

Generally, loans are placed on non-accruing status when they become 90 days or more delinquent, and remain on non-accrual status until they are brought current, have at least six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a non-accruing status.

At March 31, 2015, $135,000 or 26% of the non-accruing loan balance of $515,000 was current and being applied to principal.

There was one loan of $1.5 million that was past due ninety days or more and accruing interest at March 31, 2015. This is a residential mortgage loan which had been in non-accrual status from September 2012 until December 31, 2014. The customer has been making regular payments since September 2013, however, the loan is greater than 90 days past due because not all prior payments owed have not been brought current.

At December 31, 2014, there were five loans totaling $1.8 million which were past due ninety days or more and accruing interest. One loan of $1.6 million was the residential mortgage loan discussed above. The other four loans were mature lines of credit totaling $279,000, which were in the quarterly comparisonprocess of renewal. Three of these loans were renewed, and one paid off.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following table sets forth the detail, and delinquency status, of non-accrual loans at December 31, 2014:

(in thousands)

 

Non-Accrual Loans

     
                         

2014

 

31-60 Days Past Due

  

61-90 Days Past Due

  

Greater Than 90 Days

  

Total Past Due

  

Current

  

Total Non-Accrual Loans

 

Commercial

                        

Substandard

 -  -  2  2  -  2 

Total Commercial

 $-  $-  $2  $2  $-  $2 

Commercial Real Estate

                        

Substandard

 $-  $-  $-  $-  $138  $138 

Total Commercial Real Estate

 $-  $-  $-  $-  $138  $138 

Residential Real Estate

                        

Substandard

 $-  $-  $719  $719  $-  $719 

Total Residential Real Estate

 $-  $-  $719  $719  $-  $719 

Consumer

                        

Substandard

 $-  $-  $7  $7  $-  $7 

Total Consumer

 $-  $-  $7  $7  $-  $7 
                         

Total

 $-  $-  $728  $728  $138  $866 


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following table sets forth the detail and delinquency status of loans receivable, by performing and non-performing loans at March 31, 2015.

(in thousands)

 

Performing (Accruing) Loans

         
                                 

2015

 

31-60 Days Past Due

  

61-90 Days Past Due

  

Greater Than 90 Days

  

Total Past Due

  

Current

  

Total Performing Loans

  

Total Non-Accrual Loans

  

Total Loans

 

Commercial

                                

Pass

 $40  $-  $-  $40  $46,732  $46,772  $-  $46,772 

Special Mention

  -   -   -   -   113   113   -   113 

Substandard

  -   -   -   -   5,591   5,591   -   5,591 

Total Commercial

 $40  $-  $-  $40  $52,436  $52,476  $-  $52,476 

Commercial Real Estate

                                

Pass

 $-  $-  $-  $-  $271,956  $271,956  $-  $271,956 

Special Mention

  1,032   -   -   1,032   5,986   7,018   -   7,018 

Substandard

  -   -   -   -   2,278   2,278   135   2,413 

Total Commercial Real Estate

 $1,032  $-  $-  $1,032  $280,220  $281,252  $135  $281,387 

Construction

                                

Pass

 $-  $-  $-  $-  $7,024  $7,024  $-  $7,024 

Total Construction

 $-  $-  $-  $-  $7,024  $7,024  $-  $7,024 

Construction to Permanent

                                

Pass

 $-  $-  $-  $-  $9,988  $9,988  $-  $9,988 

Total Construction to Permanent

 $-  $-  $-  $-  $9,988  $9,988  $-  $9,988 

Residential Real Estate

                                

Pass

 $30  $178  $1,537  $1,745  $100,396  $102,141  $-  $102,141 

Substandard

  -   -   -   -   -   -   380   380 

Total Residential Real Estate

 $30  $178  $1,537  $1,745  $100,396  $102,141  $380  $102,521 

Consumer

                                

Pass

 $4  $99  $-  $103  $45,860  $45,963  $-  $45,963 

Total Consumer

 $4  $99  $-  $103  $45,860  $45,963  $-  $45,963 

Total

                                

Pass

 $74  $277  $1,537  $1,888  $481,956  $483,844  $-  $483,844 

Special Mention

  1,032   -   -   1,032   6,099   7,131   -   7,131 

Substandard

  -   -   -   -   7,869   7,869   515   8,384 

Grand Total

 $1,106  $277  $1,537  $2,920  $495,924  $498,844  $515  $499,359 


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following table sets forth the detail and delinquency status of loans receivable, by performing and non-performing loans at December 31, 2014.

(in thousands)

 

Performing (Accruing) Loans

        
                                 

2014

 

31-60 Days Past Due

  

61-90 Days Past Due

  

Greater Than 90 Days

  

Total Past Due

  

Current

  

Total Performing Loans

  

Total Non-Accrual Loans

  

Total Loans

 

Commercial

                                

Pass

 $1,520  $-  $279  $1,799  $46,279  $48,078  $-  $48,078 

Special Mention

  -   -   -   -   121   121   -   121 

Substandard

  -   -   -   -   5,772   5,772   2   5,774 

Total Commercial

 $1,520  $-  $279  $1,799  $52,172  $53,971  $2  $53,973 

Commercial Real Estate

                                

Pass

 $-  $-  $-  $-  $248,132  $248,132  $-  $248,132 

Special Mention

  1,041   -   -   1,041   2,887   3,928   -   3,928 

Substandard

  -   815   -   815   1,492   2,307   138   2,445 

Total Commercial Real Estate

 $1,041  $815  $-  $1,856  $252,511  $254,367  $138  $254,505 

Construction

                                

Pass

 $-  $-  $-  $-  $3,096  $3,096  $-  $3,096 

Total Construction

 $-  $-  $-  $-  $3,096  $3,096  $-  $3,096 

Construction to Permanent

                                

Pass

 $-  $-  $-  $-  $10,627  $10,627  $-  $10,627 

Total Construction to Permanent

 $-  $-  $-  $-  $10,627  $10,627  $-  $10,627 

Residential Real Estate

                                

Pass

 $172  $87  $1,553  $1,812  $106,012  $107,824  $-  $107,824 

Substandard

  -   -   -   -   -   -   719   719 

Total Residential Real Estate

 $172  $87  $1,553  $1,812  $106,012  $107,824  $719  $108,543 

Consumer

                                

Pass

 $-  $2  $-  $2  $46,155  $46,157  $-  $46,157 

Substandard

  -   -   -   -   -   -   7   7 

Total Consumer

 $-  $2  $-  $2  $46,155  $46,157  $7  $46,164 

Total

                                

Pass

 $1,692  $89  $1,832  $3,613  $460,301  $463,914  $-  $463,914 

Special Mention

  1,041   -   -   1,041   3,008   4,049   -   4,049 

Substandard

  -   815   -   815   7,264   8,079   866   8,945 

Grand Total

 $2,733  $904  $1,832  $5,469  $470,573  $476,042  $866  $476,908 


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Impaired loans consist of non-accrual loans, TDRs, and loans previously classified as TDRs that have been upgraded. The recorded investment of impaired loans at March 31, 2015 and December 31, 2014 was $12.2 million and $11.7 million, with related allowances of $0 and $7,000 respectively.

The following table summarizes impaired loans by loan portfolio class as of March 31, 2015

(in thousands)

 

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

 
             
             

With no related allowance recorded:

            

Commercial

 $-  $101  $- 

Commercial Real Estate

  8,272   9,113   - 

Construction

  -   287   - 

Residential

  3,406   3,433   - 

Consumer

  552   639   - 

Total:

 $12,230  $13,573  $- 
             

With an allowance recorded:

            

Commercial

 $-  $-  $- 

Commercial Real Estate

  -   -   - 

Construction

  -   -   - 

Residential

  -   -   - 

Consumer

  -   -   - 

Total:

 $-  $-  $- 
             

Commercial

 $-  $101  $- 

Commercial Real Estate

  8,272   9,113   - 

Construction

  -   287   - 

Residential

  3,406   3,433   - 

Consumer

  552   639   - 

Total:

 $12,230  $13,573  $- 


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following table summarizes impaired loans by loan portfolio class as of December 31, 2014

(in thousands)

 

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

 
             
             

With no related allowance recorded:

            

Commercial

 $2  $104  $- 

Commercial Real Estate

  7,398   8,249   - 

Construction

  -   732   - 

Residential

  3,764   3,793   - 

Consumer

  553   633   - 

Total:

 $11,717  $13,511  $- 
             

With an allowance recorded:

            

Commercial

 $-  $-  $- 

Commercial Real Estate

  -   -   - 

Construction

  -   -   - 

Residential

  -   -   - 

Consumer

  7   7   7 

Total:

 $7  $7  $7 
             

Commercial

 $2  $104  $- 

Commercial Real Estate

  7,398   8,249   - 

Construction

  -   732   - 

Residential

  3,764   3,793   - 

Consumer

  560   640   7 

Total:

 $11,724  $13,518  $7 

Included in the tables above at March 31, 2015 and December 31, 2014 are loans with carrying balances of $12.2 million and $11.7 million that required no specific reserves in our allowance for loan losses. Loans that did not require specific reserves have sufficient collateral values, less costs to sell, supporting the carrying balances of the loans. In some cases, there may be no specific reserves because the Company already charged-off the specific impairment. Once a borrower is in default, the Company is under no obligation to advance additional funds on unused commitments.

On a case-by-case basis, the Company 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 troubled debt restructured loan.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following table summarizes additional information regarding impaired loans for three months ended March 31, 2015 and 2014.

  

Three Months Ended March 31

 
  

2015

  

2014

 

(in thousands)

 

Average Recorded Investment

  

Interest Income Recognized

  

Average Recorded Investment

  

Interest Income Recognized

 
                 

With no related allowance recorded:

                

Commercial

 $1  $-  $2   86 

Commercial Real Estate

  8,296   95   7,941   72 

Construction

  -   -   -   - 

Construction to Permanent

  -   -   788   - 

Residential

  3,525   32   4,821   32 

Consumer

  552   4   588   9 

Total:

 $12,374  $131  $14,140  $199 
                 

With an allowance recorded:

                

Commercial

 $-  $-  $6,078  $- 

Commercial Real Estate

  -   -   158   - 

Construction

  -   -   260   - 

Residential

  -   -   662   - 

Consumer

  2   -   2   - 

Total:

 $2  $-  $7,160     
                 

Commercial

 $1  $-  $6,080  $86 

Commercial Real Estate

  8,296   95   8,099   72 

Construction

  -   -   260   - 

Residential

  3,525   32   5,483   32 

Consumer

  554   4   590   9 

Total:

 $12,376  $131  $21,300  $199 

No loans were modified in troubled debt restructurings during the three months ended March 31, 2015.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Substantially all of our troubled debt restructured loan modifications involve lowering the monthly payments on such loans through either a reduction in non-interest expenseinterest rate below market rate, an extension of $2.1 million,the term of the loan, or 33%,a combination of these two methods. These modifications rarely result in the forgiveness of principal or accrued interest. In addition, we frequently obtain additional collateral or guarantor support when modifying commercial loans. If the borrower had demonstrated performance under the previous terms and isour underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a resultsustained period of cost reduction initiatives implemented. This decrease included lower salariesrepayment performance (generally six consecutive months of payments) and benefits of $1.0 millionboth principal and lower professional services expense of $0.4 million.interest are deemed collectible. All troubled debt restructurings are classified as impaired loans, which are individually evaluated for impairment.

Bancorp’s net interest income for the quarter ended March 31, 2014 was $4.0 million compared to $3.9 million for the quarter ended March 31, 2013, an increase of $135,000. Included in net interest income for the quarter ending March 31, 2014 was an unfavorable adjustment related to prior period interest expense on subordinated debt of $117,000. Excluding this adjustment, net interest income increased $252,000 as compared to the quarter ended March 31, 2013. The net interest income increase was due to interest expense decrease of $757,000, partially offset by interest income reduction of $622,000. The decrease in interest expense was primarily due to strategic reduction of rates paid on term deposits, in addition to lower interest expense on borrowings. From April 2013 to September 2013, the Bank prepaid high rate borrowings, replacing these with borrowings at lower rates. The decline in interest income was due primarily to lower average loan balances primarily due to loan payoffs in excess of new loan originations, in addition to lower investment yields.

Total assets increased $21.3 million from $541.2 million at December 31, 2013 to $562.5 million at March 31, 2014. Cash and cash equivalents increased $24.9 million from $34.9 million at December 31, 2013 to $59.8 million at March 31, 2014. The net loan portfolio decreased $3.0 million from $418.1 million at December 31, 2013 to $415.1 million at March 31, 2014. The decrease was primarily a result of loan payoffs in excess of new origination of loans. Decreases in commercial real estate loans of $5.1 million and residential loans of $3.2 million were partially offset with increases in commercial loans of $3.7 million. Deposits decreased $2.2 million from $430.2 million at December 31, 2013 to $428.0 million at March 31, 2014. This was primarily due to decreases in certificates of deposit (CDs) of $7.3 million due to maturities of higher cost deposit accounts. Partially offsetting the CD decrease was an increase of $5.4 million in savings accounts reflecting increases in both consumer and commercial savings accounts. The overall cost of deposits decreased from 0.69% for the quarter ended December 31, 2013 to 0.61% for the quarter ended March 31, 2014. Borrowings increased $23.0 million to $88.2 million from $65.2 million.

FINANCIAL CONDITIONNote 4:     Deposits

Cash and Cash Equivalents

Cash and cash equivalents increased $24.9 million, or 71%, to $59.8 million at March 31, 2014 compared to $34.9 million at December 31, 2013. This increase was primarily the result of a $23.0 million increase in borrowings, reflecting the Bank’s actions to increase liquidity.

Investments

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

 

(in thousands)

  March 31,
2014
   December 31,
2013
 

U.S. Government Agency bonds

  $7,245    $7,079  

U.S. Government Agency mortgage- backed securities

   20,632     21,752  

Corporate bonds

   8,938     8,870  
  

 

 

   

 

 

 

Total Available-for-Sale Securities

  $36,815    $37,701  
  

 

 

   

 

 

 

Available-for-sale securities decreased $886,000, or 2.4%, from $37.7 million at December 31, 2013 to $36.8 million at March 31, 2014. This decrease was primarily due to principal pay downs of $1.2 million on mortgage backed securities partially offset by $393,000 in unrealized gains.

Loans

The following table is a summary of Bancorp’s loan portfolio at the dates shown:

 

                                                

(in thousands)

    March 31,
2014
   December 31,
2013
 

Real Estate

      

Commercial

    $218,051    $223,165  

Residential

     103,019     106,198  

Construction

     260     260  

Construction to permanent

     12,650     11,303  

Commercial

     38,752     35,061  

Consumer home equity

     43,717     44,081  

Consumer installment

     3,389     2,990  
    

 

 

   

 

 

 

Total Loans

     419,838     423,058  

Premiums on purchased loans

     182     200  

Net deferred costs

     583     571  

Allowance for loan losses

     (5,480   (5,681
    

 

 

   

 

 

 

Loans receivable, net

    $415,123    $418,148  
    

 

 

   

 

 

 

Bancorp’s net loan portfolio decreased $3.0 million, or 0.7%, from $418.1 million at December 31, 2013 to $415.1 million at March 31, 2014. The decrease was primarily a result of loan payoffs. Decreases in commercial real estate loans of $5.1 million and residential loans of $3.2 million were partially offset with increases in commercial loans of $3.7 million.

At March 31, 2014, the net loan to deposit ratio was 97% and the net loan to total assets ratio was 74%. At December 31, 2013, these ratios were 97% and 77%, respectively.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses decreased $201,000 from December 31, 2013 to March 31, 2014 primarily due to the partial charge-off of a non-accrual loan, which was transferred to OREO.

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 nonaccrual 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 nonaccrual 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, and there is 6 months of performance.

Management considers all non-accrual loans and troubled debt restructurings to be impaired. In most cases, loan payments that are past due less than 90 days, based on contractual terms, are considered collection delays and the related loans are not considered to be impaired. The Bank considers consumer installment loans to be pools of smaller balance homogeneous loans, which are collectively evaluated for impairment.

The changes in the allowance for loan losses for the periods shown are as follows:

                                                
     Three months ended 

(Dollars in thousands)

    March 31,
2014
  March 31,
2013
 

Balance at beginning of period

    $5,681   $6,016  

Charge-offs

     (217  (306

Recoveries

     16    37  
    

 

 

  

 

 

 

Net Charge-offs

     (201  (269
    

 

 

  

 

 

 

Provision charged to operations

     —      (30
    

 

 

  

 

 

 

Balance at end of period

    $5,480   $5,717  
    

 

 

  

 

 

 

Annualized net charge-offs during the period to average loans outstanding during the period

     0.19  0.23
    

 

 

  

 

 

 

Ratio of ALL / Gross Loans

     1.30  1.24
    

 

 

  

 

 

 

Based upon the overall assessment and evaluation of the loan portfolio, management believes the allowance for loan losses of $5.5 million, at March 31, 2014, which represents 1.30% of gross loans outstanding, is adequate under prevailing economic conditions, to absorb existing losses in the loan portfolio.

Non-Accrual, Past Due and Restructured Loans

The following table presents non-accruing loans and loans past due 90 days or more and still accruing:

                                                

(Dollars in thousands)

    March 31,
2014
  December 31,
2013
 

Loans past due over 90 days still accruing

    $834   $866  

Non accruing loans

     10,166    12,308  
    

 

 

  

 

 

 

Total

    $11,000   $13,174  
    

 

 

  

 

 

 

% of Total Loans

     2.62  3.11

% of Total Assets

     1.96  2.43

Impaired loans are primarily attributable to the lingering effects of the downturn in the economy, which has severely impacted the real estate market and placed unprecedented stress on credit markets. The Bank’s customers, many of whom are associated with the financial services industry, have been affected by the impact of the poor economy on employment and real estate values.

The $10.2 million of non-accrual loans at March 31, 2014 is comprised of 12 loans, for which a specific reserve of $1.8 million has been established. In all cases, the Bank has obtained appraisal reports from independent licensed appraisal firms and discounted those values for estimated selling costs to determine estimated impairment. Of the $10.2 million of non-accrual loans at March 31, 2014 borrowers of 4 loans with aggregate balances of $7.5 million continue to make loan payments and these loans are current within one and two months as to payments.

Potential Problem Loans

In addition to the above, there are $6.7 million of substandard accruing loans comprised of 11 loans and $8.4 million of special mention loans comprised of 16 loans for which management has a concern as to the ability of the borrowers to comply with the present repayment terms. All of the substandard accruing and all of the special mention loans with the exception of one loan of $15,000 continue to make timely payments and are within 30 days at March 31, 2014. Subsequently, one $2.6 million special mention loan paid off.

Other Real Estate Owned

The following table is a summary of Bancorp’s other real estate owned at the dates shown:

                                                
(in thousands)      
     March 31,
2014
     December 31,
2013
 

Residential real estate

    $264      $—    
    

 

 

     

 

 

 

Other real estate owned

    $264      $—    
    

 

 

     

 

 

 

The balance of other real estate owned at March 31, 2014 was comprised of 1 property with an aggregate carrying value of $264,000. The Company had a contract for the sale of this property at March 31, 2014.

Deferred Taxes

The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. Management has reviewed the deferred tax position of the Company at March 31, 2014. The valuation allowance is analyzed quarterly for changes affecting the deferred tax asset. At March 31, 2014, the company reported taxable income for the second consecutive quarter and was anticipating earnings to be positive in the future. However, based on current accounting guidance the Company has not generated taxable income for a sufficient length of time in order to reverse the DTA valuation allowance and, accordingly, had an allowance totaling $17.8 million at March 31, 2014. In the future, when the Company has generated taxable income on a more sustained basis, management’s conclusion regarding the need for a deferred tax asset valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation allowance.

Deposits

The following table is a summary of Bancorp’s deposits at the dates shown:

                                                
(in thousands)    March 31,
2014
     December 31,
2013
 

Non-interest bearing

    $57,967      $55,358  
    

 

 

     

 

 

 

Interest bearing

        

NOW

     25,464       28,618  

Savings

     86,409       80,983  

Money market

     29,502       29,310  

Time certificates, less than $100,000

     121,955       129,548  

Time certificates, $100,000 or more

     106,672       106,387  
    

 

 

     

 

 

 

Total interest bearing

     370,002       374,846  
    

 

 

     

 

 

 

Total Deposits

    $427,969      $430,204  
    

 

 

     

 

 

 

Deposits decreased $2.2 million from $430.2 million at December 31, 2013 to $428.0 million at March 31, 2014. This was primarily due to decreases in certificates of deposit (CDs) of $7.3 million due to maturities of higher rate deposit accounts and decrease in NOW balance by $3.2 million primarily due to lower IOLTA account balances. Partially offsetting the CD decrease was an increase of $5.4 million in savings accounts reflecting increases in both consumer and commercial savings accounts and a non-interest bearing balance increase of $2.6 million.

Borrowings

At March 31, 2014 and December 31, 2013, total borrowings were $88.2 million and $65.2 million respectively. In addition to the outstanding borrowings disclosed in the consolidated balance sheet, the Bank has the ability to borrow approximately $38.0 million in additional advances from the Federal Home Loan Bank of Boston (“FHLB”), including a $2.0 million overnight line of credit. The Bank has also established a line of credit at the Federal Reserve Bank. Subsequent to March 31, 2014, the Bank was in the process of collateralization of additional loans with the FHLB which will increase the Bank’s borrowing capacity with the FHLB from $38.0 million to approximately $85.0 million.

The subordinated debentures of $8,248,000 are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has entered into a guarantee, which together with its obligations under the subordinated debentures and the declaration of trust governing the Trust provides a full and unconditional guarantee of amounts on the capital securities. The subordinated debentures, which bear interest at three-month LIBOR plus 3.15% (3.3851% at March 31, 2014), mature on March 26, 2033. Beginning in the second quarter of 2009, the Company began deferring interest payments on the subordinated debentures as permitted under the terms of the debentures. Interest is still being accrued and charged to operations. The Company may only defer the payment of interest for 20 consecutive quarters, or through March 2014, and all accrued interest must be paid at the completion of the deferral period, which is June 2014. As of March 31, 2014, the accrued interest payable was approximately $1.6 million. The Company is prepared to pay the full amount of interest due pending approval from its regulators.

The duration of the trust is 30 years, with an early redemption feature at the company’s option on a quarterly basis which commenced March 26, 2008.

Capital

Capital increased $771,000 compared to December 31, 2013 primarily as a result of net income of $319,000 for the three months ended March 31, 2014, comprehensive income of $393,000 and $59,000 of share based compensation.

Off-Balance Sheet Arrangements

Bancorp’s off-balance sheet arrangements, which primarily consist of commitments to lend, increased by $4.1 million from $79.3 million at December 31, 2013 to $83.4 million at March 31, 2014, primarily due to increases of $8.4 million in future loan commitments offset by decreases of $3.3 million in unused lines of credit and $1.0 million in home equity lines of credit.

RESULTS OF OPERATIONS

Interest and dividend income and expense

The following tables present average balance sheets (daily averages), interest income, interest expense and the corresponding yields earned and rates paid for major balance sheet components:

                                                                                                                                                
     Three months ended March 31 
     2014  2013 
         Interest            Interest       
     Average   Income/     Average  Average   Income/     Average 
(in thousands)    Balance   Expense     Rate  Balance   Expense     Rate 

Interest earning assets:

                 

Loans

    $417,468    $4,691       4.56 $465,895    $5,196       4.52

Investments

     47,386     176       1.51  51,622     277       2.17

Interest bearing deposits in banks

     34,937     12       0.15  57,095     28       0.20
    

 

 

   

 

 

     

 

 

  

 

 

   

 

 

     

 

 

 

Total Interest earning assets

     499,791     4,879       3.96  574,612     5,501       3.88
    

 

 

   

 

 

     

 

 

  

 

 

   

 

 

     

 

 

 

Cash and due from banks

     1,886          5,504        

Premises and equipment, net

     14,971          3,991        

Allowance for loan losses

     (5,620        (6,017      

Other assets

     25,720          30,923        
    

 

 

        

 

 

       

Total Assets

    $536,748         $609,013        
    

 

 

        

 

 

       

Interest bearing liabilities:

                 

Deposits

    $370,034    $637       0.70 $427,770    $1,129       1.07

FHLB advances

     57,922     33       0.23  50,000     351       2.85

Subordinated debt(1)

     8,248     200       9.83  8,248     71       3.47

Other borrowings

     —       —         N/A    7,000     76       4.41
    

 

 

   

 

 

     

 

 

  

 

 

   

 

 

     

 

 

 

Total interest bearing liabilities

     436,204     870       0.81  493,018     1,627       1.34
    

 

 

   

 

 

     

 

 

  

 

 

   

 

 

     

 

 

 

Demand deposits

     54,226          61,255        

Accrued expenses and other liabilities

     3,913          5,635        

Shareholders’ equity

     42,405          49,105        
    

 

 

        

 

 

       

Total liabilities and equity

    $536,748         $609,013        
    

 

 

        

 

 

       

Net interest income

      $4,009         $3,874      
      

 

 

        

 

 

     

Interest margin

           3.25        2.73
          

 

 

        

 

 

 

Interest spread

           3.15        2.54
          

 

 

        

 

 

 

(1)

Includes $117,000 applicable to prior year adjustment.

The following rate volume analysis reflects the impact that changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities had on net interest income during the periods indicated. Information is provided in each category with respect to changes attributable to changes in volume (changes in volume multiplied by prior rate), changes attributable to changes in rates (changes in rates multiplied by prior volume) and the total net change. The change resulting from the combined impact of volume and rate is allocated proportionately to the change due to volume and the change due to rate.

                                                                        
     Three months ended March 31 
     2014 vs 2013 
     Increase (decrease) in Interest 
     Income/Expense 
     Due to change in: 
(in thousands)    Volume   Rate   Total 

Interest earning assets:

        

Loans

    $(551  $46    $(505

Investments

     (25   (76   (101

Interest bearing deposits in banks

     (13   (3   (16
    

 

 

   

 

 

   

 

 

 

Total interest earning assets

     (589   (33   (622
    

 

 

   

 

 

   

 

 

 

Interest bearing liabilities:

        

Deposits

    $(170  $(322  $(492

FHLB advances

     63     (381   (318

Subordinated debt

     0     129     129  

Other borrowings

     (76   0     (76
    

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

     (183   (574   (757
    

 

 

   

 

 

   

 

 

 

Net interest income

    $(406  $541    $135  
    

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2014, interest income was $4,879,000, a decrease of $622,000 from interest income of $5,501,000 for the quarter ended March 31, 2013. Average interest earning assets decreased $74.8 million, or 13.0%, to $499.8 million from $574.6 million and was responsible for $589,000 of the reduction in interest income. Lower investment yields partially offset by higher yields on loans was responsible for most of the remaining interest income reduction.

Total interest expense for the quarter ended March 31, 2014 of $870,000 represents a decrease of $757,000, or 46.5%, compared to interest expense of $1.6 million for the same period last year. The decrease in interest expense was primarily due to strategic reduction of rates paid on term deposits, and resulting term deposit balance reduction of $44.4 million, in addition to lower interest expense on borrowings due to rate reductions. From April 2013 to September 2013, the Bank prepaid high rate borrowings, replacing these with borrowings at lower rates. The Bank incurred a one-time charge of $117,000 during the most recent quarter related to prior period subordinated debt. Excluding this charge, the total rate on interest bearing liabilities was 0.70% as compared to 1.34% for the quarter ended March 31, 2013.

As a result of the above, Bancorp’s net interest income increased $135,000 or 3.5%, to $4.0 million for the three months ended March 31, 2014 compared to $3.9 million for the same period last year. The net interest margin for the three months ended March 31, 2014 was 3.25% as compared to 2.73% for the three months ended March 31, 2013 primarily due to the Bank’s reduction’s in average funding rates. The Bank’s margin excluding the previously noted one-time charge of $117,000 was 3.35%.

Provision for Loan Losses

Based on management’s most recent evaluation of the adequacy of the allowance for loan losses, the provision for loan losses was unchanged for the three months ended March 31, 2014, compared to $30,000 reduction of the loan loss provision for the three months ended March 31, 2013 due to the reduction of the loan portfolio and improvement in credit quality. The allowance for loan losses decreased by $201,000 from December 31, 2013 to March 31, 2014 primarily due to partial charge-off of a non-accrual loan, which was transferred to OREO.

An analysis of the changes in the allowance for loan losses is presented under “Allowance for Loan Losses.”

Non-interest income

Non-interest income increased $106,000 from $487,000 for the quarter ended March 31, 2013 to $593,000 for the quarter ended March 31, 2014. This is primarily due to increased rental income resulting from the Bank’s purchase of the previously leased Greenwich branch building in November, 2013 and Stamford branch building in May, 2013.

Non-interest expense

Non-interest expense decreased $2.1 million or 33% from $6,369,000 for the quarter ended March 31, 2013 to $4,283,000 for the quarter ended March 31, 2014. This decrease included lower salaries and benefits of $1.0 million and lower professional services expense of $0.4 million, both resulting from management initiatives to reduce non-interest expense.

LIQUIDITY

Bancorp’s liquidity ratio was 15.5% at March 31, 2014 compared to 11.5% at December 31, 2013. The liquidity ratio is defined as the percentage of liquid assets to total assets. The following categories of assets, as described in the accompanying consolidated balance sheets, are considered liquid assets: cash and due from banks, federal funds sold, short-term investments and unpledged available-for-sale securities. Liquidity is a measure of Bancorp’s ability to generate adequate cash to meet financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts and increases in its loan portfolio. Management believes Bancorp’s short-term assets provide sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash operating requirements.

CAPITAL

The following table illustrates Bancorp’s regulatory capital ratios at March 31, 2014 and December 31, 2013 respectively:

                                                
     March 31, 2014  December 31, 2013 

Tier 1 Leverage Capital

     9.56  9.33

Tier 1 Risk-based Capital

     12.87  12.70

Total Risk-based Capital

     14.12  13.95

The following table illustrates the Bank’s regulatory capital ratios at March 31, 2014 and December 31, 2013 respectively:

                                                
     March 31, 2014  December 31, 2013 

Tier 1 Leverage Capital

     9.56  9.28

Tier 1 Risk-based Capital

     12.87  12.61

Total Risk-based Capital

     14.12  13.86

IMPACT OF INFLATION AND CHANGING PRICES

Bancorp’s consolidated financial statements have been prepared in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. Notwithstanding this, inflation can directly affect the value of loan collateral, in particular, real estate. Inflation, or disinflation, could significantly affect Bancorp’s earnings in future periods.

MANAGEMENT CHANGES

There were no changes in executive management during the quarter.

  

March 31,

  

December 31,

 

(in thousands)

 

2015

  

2014

 
         
         

Non-interest bearing

 $70,331  $63,398 
         

Interest bearing

        

NOW

  26,673   26,269 

Savings

  96,846   93,790 

Money market

  23,824   24,650 

Time certificates, less than $100,000

  99,691   106,340 

Time certificates, $100,000 or more

  91,533   97,876 

Brokered Deposits

  48,209   30,710 

Total interest bearing

  386,776   379,635 

Total Deposits

 $457,107  $443,033 
Item 3:Quantitative and Qualitative Disclosures about Market Risk

Market risk is defined as

Note 5: Share-Based Compensation

The Company maintains the sensitivityPatriot National Bancorp, Inc. 2012 Stock Plan to provide an incentive to directors and employees of income to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices and other market-driven ratesthe Company by the grant of options, restricted stock awards or prices. Based upon the nature of Bancorp’s business, the primary source of market risk is interest rate risk, which is the impact that changing interest rates have on current and future earnings. In addition, Bancorp’s loan portfolio is primarily secured by real estate in the company’s market area. As a result, the changes in valuation of real estate could also impact Bancorp’s earnings.

Qualitative Aspects of Market Risk

Bancorp’s goal is to maximize long term profitability while minimizing its exposure to interest rate fluctuations.phantom stock units. The first priority is to structure and price Bancorp’s assets and liabilities to maintain an acceptable interest rate spread while reducing the net effect of changes in interest rates. In order to accomplish this, the focus is on maintaining a proper balance between the timing and volume of assets and liabilities re-pricing within the balance sheet. One method of achieving this balance is to originate variable rate loansPlan provides for the portfolio and purchase short-term investmentsissuance of up to offset the increasing short term re-pricing3,000,000 shares of the liability sideCompany’s common stock subject to certain Plan limitations. As of March 31, 2015, 2,878,805 shares of stock remain available for issuance under the Plan. The vesting of restricted stock awards and options may be accelerated in accordance with terms of the balance sheet. In fact,plan. The Compensation Committee shall determine the vesting of restricted stock awards and stock options. Restricted stock grants are available to directors and employees and generally vest in annual installments over a numberthree, four or five year period from the date of grant. The Company is expensing the grant date fair value of all share-based compensation over the requisite vesting periods on a prorated straight-line basis.

During the three months ended March 31, 2015 and March 31, 2014, the Company recorded $114,000 and $59,000 of total stock-based compensation, respectively. During the three months ended March 31, 2015, there were 2,940 shares granted under the 2012 Stock Plan.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following is a summary of the interest-bearing deposit products have no contractual maturity. Therefore, deposit balances may run off unexpectedly due to changing market conditions. Additionally, loansstatus of the Company’s restricted shares as of March 31, 2015, and investments with longer term rate adjustment frequencies are matched against longer term deposits and borrowings to lock in a desirable spread.

The exposure to interest rate risk is monitored by the Management Asset and Liability Committee consisting of senior management personnel. The Committee meets on a monthly basis, but may convene more frequently as conditions dictate. The Committee reviews the interrelationships within the balance sheet to maximize net interest income within acceptable levels of risk. This Committee reports to the Board of Directors on a monthly basis regarding its activities. In addition to the Management Asset and Liability Committee, there is a Board Asset and Liability Committee (“ALCO”), which meets quarterly. ALCO monitors the interest rate risk analyses, reviews investment transactionschanges therein during the period and determines compliance with Bank policies.then ended.

Quantitative Aspects

  

Number of Shares Awarded (1)

  Weighted Average Grant Date Fair Value (1) 
         
         

Non-vested at December 31, 2014

  79,208  $12.79 

Granted

  2,940   17.00 

Vested

  (225)  17.25 

Non-vested at March 31, 2015

  81,923  $12.93 

(1) All common stock data has been restated for a 1-for-10 reverse stock split which took effect on March 4, 2015.

Expected future stock award expense related to the non-vested restricted awards as of Market RiskMarch 31, 2015, is $988,000 over an average period of 2.66 years.

Management analyzes Bancorp’s interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation and GAP analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period.

Management’s goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to ALCO. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. Changes to these assumptions can significantly affect the results of the simulations. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.

Simulation analysis is only an estimate of Bancorp’s interest rate risk exposure at a particular point in time. Management regularly reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The table below sets forth examples of changes in estimated net interest income and the estimated net portfolio value based on projected scenarios of interest rate increases and decreases. The analyses indicate the rate risk embedded in Bancorp’s portfolioCompany had no outstanding stock options at the dates indicated should all interest rates instantaneously rise or fall. The results of these changes are added to or subtracted from the base case; however, there are certain limitations to these types of analyses. Rate changes are rarely instantaneous and these analyses may also overstate the impact of short-term repricings. As a result of the historically low interest rate environment, the calculated effects of the 100 and 200 basis point downward shocks cannot absolutely reflect the risk to earnings and equity since the interest rates on certain balance sheet items have approached their minimums, and, therefore, it is not possible for the analyses to fully measure the true impact of these downward shocks.

Net Interest Income and Economic Value

Summary PerformanceMarch 31, 2015.

 

March 31, 2014

 
   Net Interest Income  Net Portfolio Value 

Projected Interest

   Estimated     $ Change    % Change    Estimated     $ Change    % Change  

Rate Scenario

   Value     from Base    from Base    Value     from Base    from Base  

+200

   16,270     (420  -2.5  60,115     (9,609  -13.8

+100

   16,602     (88  -0.5  64,884     (4,840  -6.9

BASE

   16,690       69,724     

-100

   16,821     131    0.8  76,482     6,758    9.7

-200

   16,685     (5  0.0  80,825     11,101    15.9

December 31, 2013

 
   Net Interest Income  Net Portfolio Value 

Projected Interest

   Estimated     $ Change    % Change    Estimated     $ Change    % Change  

Rate Scenario

   Value     from Base    from Base    Value     from Base    from Base  

+200

   16,147     (780  -4.6  59,238     (11,808  -16.6

+100

   16,656     (271  -1.6  65,079     (5,967  -8.4

BASE

   16,927       71,046     

-100

   17,124     197    1.2  78,332     7,286    10.3

-200

   16,864     (63  -0.4  82,687     11,641    16.4

 

Item 4:Controls and Procedures

Based on an evaluation ofNote 6: Income Taxes

For the effectiveness of Bancorp’s disclosure controls and procedures performed by Bancorp’s management, with the participation of Bancorp’s Chief Executive Officer and its Chief Financial Officer as of the end of thethree month period covered by this report, Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that Bancorp’s disclosure controls and procedures have been effective.

As used herein, “disclosure controls and procedures” means controls and other procedures of Bancorp that are designed to ensure that information required to be disclosed by Bancorp in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Bancorp in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to Bancorp’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in Bancorp’s internal controls over financial reporting identified in connection with the evaluation described in the preceding paragraph that occurred during Bancorp’s fiscal quarter ended March 31, 2015, the bank recorded income tax expense of approximately $201,000. This compares to no income tax benefit or expense for the three month period ended March 31, 2014. Bancorp began to recognize income tax expense in the quarter ended December 31, 2014 after the reversal of $16.8 million of its deferred tax asset valuation allowance in the third quarter of 2014.

Deferred tax assets decreased $0.3 million from $14.9 million at December 31, 2014 to $14.6 million at March 31, 2015. This decrease was primarily due to deferred taxes being applied to the tax liability on current year taxable income, in addition to a reduction due to unrealized security gains.

The Bank will continue to evaluate its ability to realize its net deferred tax asset. If future evidence suggests that has materially affected, orit is reasonablymore likely to materially affect, Bancorp’s internal controls over financial reporting.

than not that a portion of the deferred tax asset will not be realized, the valuation allowance may be increased. 


PART II—OTHER INFORMATION.PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 7: Income per share

The Company is required to present basic income (loss) per share and diluted income (loss) per share in its consolidated statements of operations. Basic income (loss) per share amounts are computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted income (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 stock options and would be 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 income (loss) per share.

Non-vested restricted stock awards did not have an impact on the diluted earnings per share and the Company had no outstanding stock options. The following is information about the computation of income per share for the three months ended March 31, 2015 and 2014:

 Three months ended March 31, 2015 

Net Income

  

Weighted Average Common SharesOutstanding(1)

  

Amount (1)

 
             

Basic Earnings Per Share

 $289,000   3,871,849  $0.07 
             

Effect of Dilutive Securities

            

Non-vested Restricted Stock Grants

 

N/A

   81,923  

N/A

 
             

Diluted Earnings Per Share

 $289,000   3,953,772  $0.07 

Three months ended March 31, 2014

 Net Income  

Weighted Average Common Shares Outstanding (1)

  Amount (1) 
             

Basic Earnings Per Share

 $319,000   3,849,318  $0.08 
             

Effect of Dilutive Securities

            

Non-vested Restricted Stock Grants

 

N/A

   62,488  

N/A

 
             

Diluted Earnings Per Share

 $319,000   3,911,806  $0.08 

(1) All common stock data has been restated for a 1-for-10 reverse stock split which took effect on March 4, 2015.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 8:Other Comprehensive Income

 

Other comprehensive income, which is comprised solely of the change in unrealized gains and losses on available-for-sale securities, is as follows:

  

Three Months Ended

 
  

March 31, 2015 

 
  

Before Tax

      

Net of Tax

 

(in thousands)

 

Amount

  

Tax Effect

  

Amount

 
             

Unrealized holding gainsarising during the period

 $267  $(104)  $163 

  

Three Months Ended

 
  

March 31, 2014 

 
  

Before Tax

      

Net of Tax

 
  

Amount

  

Tax Effect

  

Amount

 
             

Unrealized holding gainsarising during the period

 $393  $-  $393 


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Item 1:Legal Proceedings

Neither Bancorp nor

Note 9:Financial Instruments with Off-Balance Sheet Risk

In the Bank has any pending legal proceedings, other than ordinary routine litigation incidental to itsnormal course of business, to which Bancorp or the BankCompany is a party or anyto financial instruments with off-balance-sheet risk to meet the financing needs of its property is subject.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 the Company has in particular classes of financial instruments.

 

Item 1A:Risk Factors

DuringThe contractual amount of commitments to extend credit and standby letters of credit represent the three months endedtotal amount of potential accounting loss should: the contracts be fully drawn upon; the customers default; and the value of any existing collateral becomes worthless. The Company uses the same credit policies in approving commitments and conditional obligations as it does for on-balance-sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis. Management believes that the Company controls the credit risk of these financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of collateral as deemed necessary.

Financial instruments whose contractual amounts represent credit risk at March 31, 2014,2015 are as follows:

Commitments to extend credit:

 

(in thousands)

 

Future loan commitments

 $9,629 

Home equity lines of credit

  24,783 

Unused lines of credit

  24,117 

Undisbursed construction loans

  8,244 

Financial standby letters of credit

  1,125 
  $67,898 

Commitments to extend credit are agreements to lend to a customer as long as there wereis no material changesviolation 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 risk factors relevant to Bancorp’s operations,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 by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include residential and commercial property, deposits and securities. The bank has established a reserve of $5,000 as of March 31, 2015 for these commitments which are describedincluded in accrued expenses and other liabilities.

Standby letters of credit are written commitments issued by the Annual ReportCompany to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded on Form 10-K for the year endedCompany’s consolidated balance sheet at their fair value at inception.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 10: Regulatory and Operational Matters

The Company’s and the Bank’s capital and capital ratios at March 31, 2015 and December 31, 2013.2014 were:

 

          

Capital Requirements

 
  

Actual

  

Minimum

  

Well Capitalized

 

(dollars in thousands)

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
                         

March 31, 2015

                        
                         

The Company:

                        
                         

Tier 1 Leverage Capital (to Average Assets)

 $57,129   9.23% $24,753   4.00% $30,941   5.00%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

  49,129   10.03%  22,044   4.50%  31,842   6.50%

Tier 1 Capital (to Risk Weighted Assets)

  57,129   11.66%  29,393   6.00%  39,190   8.00%

Total Capital (to Risk Weighted Assets)

  62,322   12.72%  39,190   8.00%  48,988   10.00%
                         

The Bank:

                        
                         

Tier 1 Leverage Capital (to Average Assets)

 $57,221   9.25% $24,746   4.00% $30,932   5.00%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

  57,221   11.69%  22,033   4.50%  31,826   6.50%

Tier 1 Capital (to Risk Weighted Assets)

  57,221   11.69%  29,378   6.00%  39,170   8.00%

Total Capital (to Risk Weighted Assets)

  62,414   12.75%  39,170   8.00%  48,963   10.00%
                         

December 31, 2014

                        
                         

The Company:

                        
                         

Tier 1 Leverage Capital (to Average Assets)

 $58,218   9.62% $24,210   4.00% $30,262   5.00%

Tier 1 Capital (to Risk Weighted Assets)

  58,218   12.98%  17,942   4.00%  26,913   6.00%

Total Capital (to Risk Weighted Assets)

  63,142   14.08%  35,884   8.00%  44,855   10.00%
                         

The Bank:

                        
                         

Tier 1 Leverage Capital (to Average Assets)

 $58,227   9.63% $24,198   4.00% $30,247   5.00%

Tier 1 Capital (to Risk Weighted Assets)

  58,227   12.98%  17,946   4.00%  26,918   6.00%

Total Capital (to Risk Weighted Assets)

  63,151   14.08%  35,891   8.00%  44,864   10.00%


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 11:Fair Value and Interest Rate Risk

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A fair value hierarchy has been established that prioritizes the inputs used to measure fair value, requiring entities to maximize the use of observable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs generally require significant management judgment.

The three levels within the fair value hierarchy are as follows:

Item 6:

Exhibits

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:

No.

 

Description

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, federal funds sold, short-term investments 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: These financial instruments are recorded at fair value on a recurring basis in the financial statements. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.

Other Investments:The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund totaling $4.5 million. This investment is utilized for the purposes of the Bank satisfying its CRA lending requirements. As this fund operates as a private fund, shares in the Fund are not publicly traded and therefore have no readily determinable market value. An investment in the Fund is reported in the financial statements at cost, as adjusted for income, losses, and cash distributions attributable to the investment.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Loans:For variable rate loans, which reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using the period end rates, estimated by using local market data, at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios. As estimates are dependent on management’s observations, loans are classified as Level 3. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired loans are recorded to reflect partial write-downs based on the observable market price or current appraised value of collateral. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Other Real Estate Owned: The fair value of OREO properties the Company may obtain is based on the estimated current property valuations less estimated selling costs. When the fair value is based on current observable appraised values, OREO is classified within Level 2. The Company classifies the OREO within Level 3 when unobservable adjustments are made to appraised values. The Company does not record other real estate owned at fair value on a recurring basis.

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. The Company does not record deposits at fair value on a recurring basis.

Junior Subordinated Debt:Junior subordinated debt reprices quarterly and as a result the carrying amount is considered a reasonable estimate of fair value. The Company does not record junior subordinated debt at fair value on a recurring basis.

Federal Home Loan Bank Borrowings: The fair value of the advances is estimated using a discounted cash flow calculation that applies current Federal Home Loan Bank interest rates for advances of similar maturity to a schedule of maturities of such advances. The Company does not record these borrowings at fair value on a recurring basis.

Off-balance sheet instruments: Fair values for the Company’s off-balance-sheet instruments (lending commitments) 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 Company does not record its off-balance-sheet instruments at fair value on a recurring basis.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following table details the financial assets measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine fair value:

  

Quoted Prices in

  

Significant

  

Significant

     

(in thousands)

 

Active Markets

  

Observable

  

Unobservable

  

Balance

 
  

for Identical Assets

  

Inputs

  

Inputs

  

as of

 

March 31, 2015

 

(Level 1)

  

(Level 2)

  

(Level 3)

  

March 31, 2015

 
                 

U.S. Government agency mortgage-backed securities

 $-  $16,276  $-  $16,276 

U.S. Government agency bonds

  -   7,496   -   7,496 

Corporate bonds

  -   8,966   -   8,966 

Securities available for sale

 $-  $32,738  $-  $32,738 

  

Quoted Prices in

  

Significant

  

Significant

     
  

Active Markets

  

Observable

  

Unobservable

  

Balance

 
  

for Identical Assets

  

Inputs

  

Inputs

  

as of

 

December 31, 2014

 

(Level 1)

  

(Level 2)

  

(Level 3)

  

December 31, 2014

 
                 

U.S. Government agency mortgage-backed securities

 $-  $17,337  $-  $17,337 

U.S. Government agency bonds

  -   7,409   -   7,409 

Corporate bonds

  -   8,936   -   8,936 

Securities available for sale

 $-  $33,682  $-  $33,682 

There were no transfers of assets between levels 1, 2 or 3 as of March 31, 2015 or December 31, 2014. Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following reflects financial assets measured at fair value on a non-recurring basis as of March 31, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized:

  

Quoted Prices in

  

Significant

  

Significant

     

(in thousands)

 

Active Markets

  

Observable

  

Unobservable

     
  

for Identical Assets

  

Inputs

  

Inputs

  

Balance

 
  

(Level 1)

  

(Level 2)

  

(Level 3)

     

March 31, 2015

                
                 

Impaired loans

 $-  $-  $535  $535 
                 

December 31, 2014

                
                 

Impaired loans

 $-  $-  $859  $859 

(in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

 
          

Asset Description

 

Fair Value

 

Valuation

Technique

 

Unobservable

Input

 

Range

(WeightedAverage)

 
              

March 31, 2015

             
              

Impaired loans

 $535 

Fair Value of Collateral (1)

 

Appraised Value (2)

  14%-23% (16%) (3) 
              

December 31, 2014

             
              

Impaired loans

 $859 

Fair Value of Collateral (1)

 

Appraised Value (2)

  8%-22% (13%) (3) 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3)

The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value.

The Company 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 represent the underlying value of the Company.

The estimated fair value amounts have been measured as of March 31, 2015 and December 31, 2014 and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair value of these financial instruments subsequent to the respective reporting dates may be different than amounts reported on those dates.

The information presented should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other bank holding companies may not be meaningful.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following is a summary of the carrying amounts and estimated fair values of the Company’s financial instruments not measured and not reported at fair value on the consolidated balance sheets at March 31, 2015 and December 31, 2014:

   

March 31, 2015

  

December 31, 2014

 

(in thousands)

Fair Value

 

Carrying

  

Estimated

  

Carrying

  

Estimated

 
 Hierarchy 

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Financial Assets:

                 

Cash and noninterest bearing balances due from banks

Level 1

 $2,080  $2,080  $2,095  $2,095 

Interest-bearing deposits due from banks

Level 1

  63,878   63,878   71,163   71,163 

Other investments

Level 2

  4,450   4,450   4,450   4,450 

Federal Reserve Bank stock

Level 2

  2,020   2,020   2,058   2,058 

Federal Home Loan Bank stock

Level 2

  6,628   6,628   6,628   6,628 

Loans receivable, net

Level 3

  494,166   499,383   471,984   476,631 

Accrued interest receivable

Level 1

  1,974   1,974   1,918   1,918 
                  

Financial Liabilities:

                 

Demand deposits

Level 1

 $70,331  $70,331  $63,398  $63,398 

Savings deposits

Level 1

  96,846   96,846   93,790   93,790 

Money market deposits

Level 1

  23,824   23,824   24,650   24,650 

NOW accounts

Level 1

  26,673   26,673   26,269   26,269 

Time deposits

Level 2

  191,224   191,331   204,216   204,262 

Brokered Deposits

Level 1

  48,209   48,209   30,710   30,710 

FHLB Borrowings

Level 2

  120,000   120,000   120,000   120,000 

Subordinated debentures

Level 2

  8,248   8,248   8,248   8,248 

Accrued interest payable

Level 1

  251   251   167   167 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent possible to mitigate interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Off-balance sheet instruments

Loan commitments on which the committed interest rate is less than the current market rate were insignificant at March 31, 2015 and December 31, 2014. The estimated fair value of fee income on letters of credit at March 31, 2015 and December 31, 2014 was also insignificant.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note12:     Recent Accounting Pronouncements     

Recently Issued Accounting Standards Updates

ASU 2014-14, “Receivables - Troubled Debt Restructuring by Creditors (Subtopic 310-40)Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure which will require creditors to derecognize certain foreclosed government-guaranteed mortgage loans and to recognize a separate other receivable that is measured at the amount the creditor expects to recover from the guarantor, and to treat the guarantee and the receivable as a single unit of account. ASU 2014-14 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the ASU is effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. An entity can elect a prospective or a modified retrospective transition method, but must use the same transition method that it elected under FASB ASU No. 2014-04,Reclassification of Residential Real EstateCollateralized Consumer Mortgage Loans upon Foreclosure. Early adoption, including adoption in an interim period, is permitted if the entity already adopted ASU 2014-04. The application of this guidance did not have a material impact on the Company's consolidated financial statements.

ASU No. 2014-12, Compensation-Stock Compensation (Topic 718)Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force).The ASU provides explicit guidance to account for a performance target that could be achieved after the requisite service period as a performance condition. For awards within the scope of this Update, the Task Force decided that an entity should apply existing guidance in Topic 718 as it relates to share-based payments with performance conditions that affect vesting. Consistent with that guidance, performance conditions that affect vesting should not be reflected in estimating the fair value of an award at the grant date. Compensation cost should be recognized when it is probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The amendments are effective for annual and interim periods beginning after January 1, 2016. The Company does not expect the application of this guidance to have a material impact on the Company's consolidated financial statements.

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.


PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

ASU No. 2014-04,“Receivables – Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure,” was issued to clarify that when an in substance repossession or foreclosure occurs, a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-04 is effective for annual reporting periods beginning after December 15, 2014. The application of this guidance did not have a material impact on the Company's consolidated financial statements.

ASU No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects (Topic 323)“- allows an entity that invests in low income housing projects and meets all the specified conditions to use the proportional amortization method to account for the costs of those investments. The effective date is for annual periods and interim periods within those annual periods beginning after December 15, 2014. The application of this guidance did not have a material impact on the Company's consolidated financial statements.


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements contained in Bancorp’s public statements, including this one, and in particular in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may be forward looking and subject to a variety of risks and uncertainties. These factors include, but are not limited to; (1) changes in prevailing interest rates which would affect the interest earned on Bancorp’s interest earning assets and the interest paid on its interest bearing liabilities; (2) the timing of repricing of Bancorp’s interest earning assets and interest bearing liabilities; (3) the effect of changes in governmental monetary policy; (4) the effect of changes in regulations applicable to Bancorp and the Bank and the conduct of its business; (5) changes in competition among financial service companies, including possible further encroachment of non-banks on services traditionally provided by banks; (6) the ability of competitors that are larger than Bancorp to provide products and services which it is impracticable for Bancorp to provide; (7) the state of the economy and real estate values in Bancorp’s market areas, and the consequent effect on the quality of Bancorp’s loans, (8) recent governmental initiatives that are expected to have a profound effect on the financial services industry and could dramatically change the competitive environment of the Company ; (9) other legislative or regulatory changes, including those related to residential mortgages, changes in accounting standards, and Federal Deposit Insurance Corporation (“FDIC”) premiums that may adversely affect the Company; (10) the application of generally accepted accounting principles, consistently applied, (11) the fact that one period of reported results may not be indicative of future periods, (12) the state of the economy in the greater New York metropolitan area and its particular effect on the Company's customers, vendors and communities and other such factors, including risk factors, as may be described in Bancorp's other filings with the SEC.

Although Bancorp believes that it offers the loan and deposit products and has the resources needed for continued success, future revenues and interest spreads and yields cannot be reliably predicted. These trends may cause Bancorp to adjust its operations in the future. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results or stock prices.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified the accounting for the allowance for loan losses, the analysis and valuation of its investment securities and the valuation of deferred tax assets, as Bancorp’s most critical accounting policies and estimates in that they are important to the portrayal of Bancorp’s financial condition and results of operations. They require management’s most subjective and complex judgment as a result of the need to make estimates about the effect of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis.


Summary

Bancorp reported net income of $289,000 ($0.07 basic and diluted income per share) for the quarter ended March 31, 2015; a decrease of $30,000, compared to net income of $319,000 ($0.08 basic and diluted income per share) for the quarter ended March 31, 2014. Income before income taxes was $490,000 for the quarter ended March 31, 2015; an increase of $171,000, or 53.6% compared to $319,000 for the quarter ended March 31, 2014. Bancorp did not recognize income tax expense in the quarter ended March 31, 2014 as the Company had a fully reserved deferred tax asset at the end of the quarter. The Company reversed $16.8 million of the deferred tax asset valuation allowance in September 2014, and subsequently began to recognize income tax expense.

Total assets increased $14.5 million, or 2.3%, from $632.6 million at December 31, 2014 to $647.1 million at March 31, 2015.

Cash and cash equivalents decreased $7.3 million from $73.3 million at December 31, 2014 to $66.0 million at March 31, 2015.

The net loan portfolio increased $22.2 million, or 4.7%, from $472.0 million at December 31, 2014 to $494.2 million at March 31, 2015.

Total liabilities increased $13.9 million from $573.9 million at December 31, 2014 to $587.8 million at March 31, 2015.

Deposits increased $14.1 million from $443.0 million at December 31, 2014 to $457.1 million at March 31, 2015. Interest bearing deposits increased $7.2 million and non-interest bearing deposits increased $6.9 million.

Equity increased $566,000 from $58.7 million at December 31, 2014 to $59.3 million at March 31, 2015 due to net income of $289,000, a decrease of $163,000 in net unrealized loss on securities, and equity compensation of $114,000.

Financial Condition

Cash and Cash Equivalents

Cash and cash equivalents decreased $7.3 million, or 10%, to $66.0 million at March 31, 2015 compared to $73.3 million at December 31, 2014. The decrease was primarily due to an increase in net loans of $22.2 million partially offset by an increase in deposits of $14.1 million.


Investments

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

(dollars in thousands)

 

March 31,

  

December 31,

         
  

2015

  

2014

  

Inc/ (Dec)

  

Inc/(Dec) %

 
                 
                 

U.S. Government Agency bonds

 $7,496  $7,409  $87   1.2%

U.S. Government Agency mortgage-backed securities

  16,276   17,337   (1,061)  (6.1)

Corporate bonds

  8,966   8,936   30   0.3 
                 

Total Available-for-Sale Securities

 $32,738  $33,682  $(944)  (2.8%)

Available-for-sale securities decreased $944,000, or 2.8%, from $33.7 million at December 31, 2014 to $32.7 million at March 31, 2015. This decrease was primarily due to principal pay downs of $1.2 million and premium amortization of $58,000 on mortgage backed securities partially offset by a decrease of$267,000 in gross unrealized security losses.


Loans

The following table is a summary of Bancorp’s loan portfolio at the dates shown:

(in thousands)

 

March 31,

  

December 31,

         
  

2015

  

2014

  

Inc (Dec)

  

Inc/(Dec) %

 

Commercial

 52,476  53,973  (1,497)  (2.8%)

Commercial Real Estate

  281,387   254,505   26,882   10.6 

Construction

  7,024   3,096   3,928   126.9 

Construction to permanent

  9,988   10,627   (639)  (6.0)

Residential

  102,521   108,543   (6,022)  (5.5)

Consumer

  45,963   46,164   (201)  (0.4)

Total Loans

  499,359   476,908   22,451   4.7 

Allowance for loan losses

  (5,193)  (4,924)  269   5.5 

Loans receivable, net

 $494,166  $471,984  $22,182   4.7%

Bancorp’s net loan portfolio increased $22.2 million, or 4.7%, from $472.0 million at December 31, 2014 to $494.2 million at March 31, 2015. The increase was primarily due to loan originations.

At March 31, 2015, the net loan to deposit ratio was 108% and the net loan to total assets ratio was 76%. At December 31, 2014, these ratios were 107% and 75%, respectively.

Allowance for Loan Losses

The allowance for loan losses increased $269,000, from December 31, 2014 to March 31, 2015 due to a provision of $250,000 and net recoveries during the quarter ended March 31, 2015 of $19,000. The allowance increase was due to the increased loan balances and not deterioration in the credit quality of the loan portfolio.


The changes in the allowance for loan losses for the periods shown are as follows:

  

Three months ended

 
  

March 31,

  

March 31,

 

(dollars in thousands)

 

2015

  

2014

 
         

Balance at beginning of period

 $4,924  $5,681 
         

Charge-offs

  (10)  (217)

Recoveries

  29   16 

Net Recoveries (Charge-offs)

  19   (201)

Provision for loan losses

  250   - 

Balance at end of period

 $5,193  $5,480 
         

Annualized net charge-offs duringthe period to average loansoutstanding

  -0.02%  0.19%
         

Ratio of ALL / Gross Loans

  1.04%  1.30%
         
Ratio of ALL / Non-accrual loans  1,028.3%  53.9%

Based upon the overall assessment and evaluation of the loan portfolio, management believes the allowance for loan losses of $5.2 million, at March 31, 2015, which represents 1.04% of gross loans outstanding, is adequate under prevailing economic conditions to absorb existing losses in the loan portfolio.

Non-Accrual, Past Due and Restructured Loans

The following table presents non-accruing loans and loans past due 90 days or more and still accruing:

  

March 31,

  

December 31,

 

(dollars in thousands)

 

2015

  

2014

 
         

Loans past due over 90 days and still accruing

 $1,537  $1,832 

Non-accruing loans

  515   866 

Total

 $2,052  $2,698 

% of Total Loans

  0.41%  0.57%

% of Total Assets

  0.32%  0.43%

The $515,000 of non-accrual loans at March 31, 2015 is comprised of 2 loans, for which no specific reserve has been established. One loan of $135,000 is current on payments. In all cases, the Bank has obtained appraisal reports from independent licensed appraisal firms and discounted those values for estimated selling costs to determine estimated impairment.

The $866,000 of non-accrual loans at December 31, 2014 was comprised of 4 loans, for which a specific reserve of $7,000 had been established. During the quarter ended March 31, 2015, one loan of $7,000 which was fully reserved for was charged off and another loan of $339,000 was paid off.


Other Real Estate Owned

There was no real estate owned at March 31, 2015 and December 31, 2014. During 2014, one OREO property was foreclosed in February, and subsequently sold in May.

Deferred Taxes                    

Deferred tax assets decreased $0.3 million from $14.9 million at December 31, 2014 to $14.6 million at March 31, 2015. This decrease was primarily due to the utilization of net operating loss carryforwards applied to the tax liability on current year taxable income, in addition to reduction in the deferred taxes on net unrealized security losses.

The Bank will continue to evaluate its ability to realize its net deferred tax asset. If future evidence suggests that it is more likely than not that a portion of the deferred tax asset will not be realized, the valuation allowance may be increased. 

Deposits

The following table is a summary of Bancorp’s deposits at the dates shown:

  

March 31,

  

December 31,

         

(dollars in thousands)

 

2015

  

2014

  

Inc/(Dec)

  

Inc/(Dec)%

 
                 

Non-interest bearing

 $70,331  $63,398  $6,933   10.9%
                 

Interest bearing

                

NOW

  26,673   26,269   404   1.5 

Savings

  96,846   93,790   3,056   3.3 

Money market

  23,824   24,650   (826)  (3.4)

Time certificates, less than $100,000

  99,691   106,340   (6,649)  (6.3)

Time certificates, $100,000 or more

  91,533   97,876   (6,343)  (6.5)

Brokered Deposits

  48,209   30,710   17,499   57.0 

Total interest bearing

  386,776   379,635   7,141   1.9 

Total Deposits

 $457,107  $443,033  $14,074   3.2%

Deposits increased $14.1 million from $443.0 million at December 31, 2014 to $457.1 million at March 31, 2015. This increase was primarily due to increases in brokered deposits of $17.5 million, non-interest bearing deposits of $6.9 million and savings deposits of $3.1 million partially offset by a decrease in time deposit balances of $13.0 million. The additional brokered deposits were obtained to maintain liquidity in anticipation of future loan growth.


Borrowings

Total borrowings were $128.2 million at March 31, 2015 and December 31, 2014, and were comprised of $120 million in Federal Home Loan Bank (“FHLB”) advances and $8.2 million in junior subordinated debentures.

The FHLB advances had a weighted average rate of 0.27%. All had remaining maturities of less than six months. 

The subordinated debentures of $8.2 million are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has entered into a guarantee, which together with its obligations under the subordinated debentures and the declaration of trust governing the Trust provides a full and unconditional guarantee of the capital securities. The subordinated debentures, which bear interest at three-month LIBOR plus 3.15% (3.42% at March 31, 2015) mature on March 26, 2033. Beginning in the second quarter of 2009, the Company deferred quarterly interest payments on the subordinated debentures for 20 consecutive quarters as permitted under the terms of the debentures. Interest was still being accrued and charged to operations. The Company made a payment of approximately $1.6 million in June 2014, and brought the debt current as of that date. Interest payments have subsequently been deferred at the Company’s option, and interest owed was $212,000 at March 31, 2015.

The trust has an early redemption feature at the Company’s option exercisable on a quarterly basis.

Equity

Equity increased $566,000 from $58.7 million at December 31, 2014 to $59.3 million at March 31, 2015 due to net income of $289,000, a decrease of $163,000 in net unrealized loss on securities, and equity compensation of $114,000.

Off-Balance Sheet Arrangements

Bancorp’s off-balance sheet arrangements, which primarily consist of commitments to lend, decreased by $16.6 million from $84.5 million at December 31, 2014 to $67.9 million at March 31, 2015.


RESULTS OF OPERATIONS

Net Interest Income

The following table presents average balance sheets (daily averages), interest income, interest expense and the corresponding yields earned and rates paid:

  

Average Balance Sheet

 
  

Net Interest income- Rate and Volume Variance Analysis

 
  

Three months ended March 31,

 
      

2015

          

2014

     
      

Interest

          

Interest

     
  

Average

  

Income/

  

Average

  

Average

  

Income/

  

Average

 
  

Balance

  

Expense

  

Rate

  

Balance

  

Expense

  

Rate

 

(dollars in thousands)

                        

Interest earning assets:

                        

Loans

 $491,118  $5,546   4.58% $417,468  $4,691   4.56%

Investments

  46,370   173   1.51%  47,386   176   1.51%

Cash Equivalents

  52,803   29   0.22%  34,937   12   0.15%

Total interest earning assets

  590,291   5,748   3.95%  499,791   4,879   3.96%
                         

Cash and due from banks

  2,675           1,886         

Premises and equipment, net

  22,592           14,971         

Allowance for loan losses

  (4,932)          (5,620)        

Other assets

  18,293           25,720         

Total Assets

 $628,919          $536,748         
                         

Interest bearing liabilities:

                        

Deposits

 $374,850  $529   0.57% $370,034  $637   0.70%

Borrowings

  120,000   71   0.24%  57,922   33   0.23%

Subordinated debt

  8,248   71   3.49%  8,248   200   9.83%
                         

Total interest bearing liabilities

  503,098   671   0.54%  436,204   870   0.81%
                         

Demand deposits

  63,490           54,226         

Accrued expenses and other liabilities

  2,988           3,913         

Shareholders' equity

  59,343           42,405         

Total liabilities and equity

 $628,919          $536,748         
                         

Net interest income

     $5,077          $4,009     

Interest margin

          3.49%          3.25%

Interest spread

          3.41%          3.15%


The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-bearing assets and interest-bearing liabilities:

  

Three months ended March 31,

 
  

2015 vs 2014

 
  

Increase (decrease)

 
  

due to change in

 

(dollars in thousands)

 

Volume

  

Rate

  

Total

 

Interest earning assets:

            

Loans

 $834  $21  $855 

Investments

  (3)  -   (3)

Cash Equivalents

  8   9   17 

Total interest earning assets

 839  30  869 
             

Interest bearing liabilities:

            

Deposits

 $8  $(116) $(108)

Borrowings

  37   1   38 

Subordinated debt

  -   (129)  (129)

Total interest bearing liabilities

  45   (244)  (199)

Net interest income

 $794  $274  $1,068 

For the quarter ended March 31, 2015, net interest income was $5.1 million, an increase of $1.1 million or 27.5% from net interest income of $4.0 million for the quarter ended March 31, 2014. Interest income increased $869,000 and interest expense decreased $199,000.

The interest income increase was primarily due to an increase in average loan balances of $73.6 million. This increase in average loans was accountable for $834,000 of the interest income increase. Improvement in average loan yields to 4.58% from 4.56% contributed additional interest income of $21,000.    

The interest expense reduction of $199,000 for the quarter ended March 31, 2015 was due to decrease in deposit and subordinated debt interest expense of $108,000 and $129,000 respectively, partially offset by an increase in interest expense on borrowings of $38,000.

The decrease in interest expense on deposits was primarily due to maturity and roll off of higher yielding time deposits and replacement of these with lower yielding deposit products.

Interest expense on subordinated debt decreased $129,000 primarily due to additional expense of $117,000 in 1Q 2014 to recognize interest owed on 20 quarters of interest payments which had been deferred as allowed by the terms of the subordinated debt agreement.

Interest expense on FHLB borrowings increased $38,000 primarily due to higher average borrowings of $62.1 million. The Company took the opportunity to fund the increase in its loan portfolio through low-cost FHLB structured advances.

Net interest margin for the quarter ended March 31, 2015 was 3.49% as compared to 3.25% for the quarter ended March 31, 2014. Excluding the impact of the additional subordinated debt interest expense of $117,000, net interest margin for the quarter ended March 31, 2014 was 3.35%.


Provision for Loan Losses

Provision for loan losses of $250,000 was recorded in the three months ended March 31, 2015, based on management’s most recent evaluation of the adequacy of the allowance for loan losses. The increase was due to significant growth in loan balances.

An analysis of the changes in the allowance for loan losses is presented under “Allowance for Loan Losses.”

Non-interest income

Non-interest income decreased $199,000 from $593,000 for the quarter ended March 31, 2014 to $394,000 for the quarter ended March 31, 2015. Decrease in BOLI income due to liquidation of the Bank’s BOLI policies in December 2014 was responsible for $121,000 of the decrease. Deposit fees decreased $45,000 due to lower overdraft fees.

Non-interest expense

Non-interest expense increased $448,000, or 10.5%, from $4.3 million for the quarter ended March 31, 2014 to $4.7 million for the quarter ended March 31, 2015. Salaries and benefits increased $373,000 primarily due to personnel increases due to the Bank’s growth and funding of a performance incentive pool eligible to all employees. Professional and other outside services expense increased $98,000 primarily due to consulting engagements which are expected to improve operational efficiencies in addition to higher employee placement fees of $30,000. These increases were partially offset by reduction in regulatory assessments of $76,000, primarily due to ratings upgrades received in September 2014 from the Bank’s regulators.    

Liquidity

Bancorp's liquidity ratio was 14.2% at March 31, 2015 compared to 15.6% at December 31, 2014. The liquidity ratio is defined as the percentage of liquid assets to total assets. The following categories of assets, as described in the accompanying consolidated balance sheets, are considered liquid assets: cash and due from banks, federal funds sold, short-term investments and unpledged available-for-sale securities. Liquidity is a measure of Bancorp’s ability to generate adequate cash to meet financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts and increases in its loan portfolio. Management believes Bancorp’s short-term assets provide sufficient liquidity to satisfy loan demand, cover potential fluctuations in deposit accounts and to meet other anticipated and unanticipated cash requirements.


Capital

The following table illustrates Bancorp’s regulatory capital ratios at March 31, 2015 and December 31, 2014 respectively:

  

March 31,

2015

  

December 31,

2014

 

Tier 1 Leverage Capital

  9.23%   9.62% 

Common Equity Tier 1 Capital

  10.03%   - 

Tier 1 Risk-based Capital

  11.66%   12.98% 

Total Risk-based Capital

  12.72%   14.08% 

The following table illustrates the Bank’s regulatory capital ratios at March 31, 2015 and December 31, 2014 respectively:

  

March 31,

2015

  

December 31,

2014

 

Tier 1 Leverage Capital

  9.25%   9.63% 

Common Equity Tier 1 Capital

  11.69%   - 

Tier 1 Risk-based Capital

  11.69%   12.98% 

Total Risk-based Capital

  12.75%   14.08% 

The implementation of the Basel III final framework commenced on January 1, 2015, for both The Company and The Bank. Amongst other provisions, Basel III increased some asset risk weightings, introduced a new capital measure “Common Equity Tier 1” and will increase capital ratio requirements during a phase in period from January 1, 2015 to January 1, 2019. Both the Company’s and The Bank’s current capital ratios exceed the fully phased in minimum capital ratios of Basel III. The minimum required ratios per Basel III for 2015 and 2019 are:

  

January 01,

2015

  

January 01,

2019

 

Tier 1 Leverage Capital

  4.00%   4.00% 

Common Equity Tier 1 Capital

  4.50%   7.00% 

Tier 1 Risk-based Capital

  6.00%   8.50% 

Total Risk-based Capital

  8.00%   10.50% 


IMPACT OF INFLATION AND CHANGING PRICES

Bancorp’s consolidated financial statements have been prepared in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. Notwithstanding this, inflation can directly affect the value of loan collateral, in particular, real estate. Inflation, or disinflation, could significantly affect Bancorp’s earnings in future periods.

MANAGEMENT CHANGES

There were no changes in executive management during the quarter.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

Market risk is defined as the sensitivity of income to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices and other market-driven rates or prices. Bancorp’s market risk is primarily limited to interest rate risk.

Bancorp’s goal is to maximize long term profitability while minimizing its exposure to interest rate fluctuations. The first priority is to structure and price Bancorp’s assets and liabilities to maintain an acceptable interest rate spread while reducing the net effect of changes in interest rates. In order to accomplish this, the focus is on maintaining a proper balance between the timing and volume of assets and liabilities re-pricing within the balance sheet. One method of achieving this balance is to originate variable rate loans for the portfolio and purchase short-term investments to offset the increasing short term re-pricing of the liability side of the balance sheet. In fact, a number of the interest-bearing deposit products have no contractual maturity. Therefore, deposit balances may run off unexpectedly due to changing market conditions. Additionally, loans and investments with longer term rate adjustment frequencies can be matched against longer term deposits and borrowings to lock in a desirable spread.

The exposure to interest rate risk is monitored by the Management Asset and Liability Committee consisting of senior management personnel. The Committee reviews the interrelationships within the balance sheet to maximize net interest income within acceptable levels of risk. This Committee reports to the Board of Directors. In addition to the Management Asset and Liability Committee, there is a Board Asset and Liability Committee (“ALCO”), which meets quarterly. ALCO monitors the interest rate risk analyses, reviews investment transactions during the period and determines compliance with Bank, ALCO and Liquidity policies.

Management analyzes Bancorp’s interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation and GAP analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period.

Management’s goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to ALCO. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. Changes to these assumptions can significantly affect the results of the simulations. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.

Simulation analysis is only an estimate of Bancorp’s interest rate risk exposure at a particular point in time. Management regularly reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities. 


The table below sets forth examples of changes in estimated net interest income and the estimated net portfolio value based on projected scenarios of interest rate increases and decreases. The analyses indicate the rate risk embedded in Bancorp’s portfolio at the dates indicated should all interest rates instantaneously rise or fall. The results of these changes are added to or subtracted from the base case; however, there are certain limitations to these types of analyses. Rate changes are rarely instantaneous and these analyses may also overstate the impact of short-term repricings. As a result of the historically low interest rate environment, the calculated effects of the 100 and 200 basis point downward shocks cannot absolutely reflect the risk to earnings and equity since the interest rates on certain balance sheet items have approached their minimums and therefore, it is not possible for the analyses to fully measure the true impact of these downward shocks.

Net Interest Income and Economic Value

 

Summary Performance

 

(dollars in thousands)

                         
   

March 31, 2015

 
   

Net Interest Income

  

Net Portfolio Value

 

Projected Interest

  

Estimated

  

$ Change

  

% Change

  

Estimated

  

$ Change

  

% Change

 

Rate Scenario

  

Value

  

from Base

  

from Base

  

Value

  

from Base

  

from Base

 

+ 200

   21,652   180   0.8%  73,863   (8,874)  -10.7%

+ 100

   21,616   144   0.7%  77,856   (4,881)  -5.9%

BASE

   21,472   -   -   82,737   -   - 
- 100   21,903   431   2.0%  91,134   8,397   10.1%
- 200   21,862   390   1.8%  98,562   15,825   19.1%
                          
                          
   

December 31, 2014

 
   

Net Interest Income

  

Net Portfolio Value

 

Projected Interest

  

Estimated

  

Change

  

% Change

  

Estimated

  

Change

  

% Change

 

Rate Scenario

  

Value

  

from Base

  

from Base

  

Value

  

from Base

  

from Base

 

+ 200

   19,986   (104)  -0.5%  74,830   (8,854)  -10.6%

+ 100

   20,152   62   0.3%  79,390   (4,294)  -5.1%

BASE

   20,090   -   -   83,684   -   - 
- 100   20,552   462   2.3%  91,063   7,379   8.8%
- 200   20,408   318   1.6%  95,939   12,255   14.6%


Item 4: Controls and Procedures 

Based on an evaluation of the effectiveness of Bancorp’s disclosure controls and procedures performed by Bancorp’s management, with the participation of Bancorp’s Chief Executive Officer and its Chief Financial Officer as of the end of the period covered by this report, Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that Bancorp’s disclosure controls and procedures have been effective.

As used herein, “disclosure controls and procedures” means controls and other procedures of Bancorp that are designed to ensure that information required to be disclosed by Bancorp in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Bancorp in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to Bancorp’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in Bancorp’s internal controls over financial reporting identified in connection with the evaluation described in the preceding paragraph that occurred during Bancorp’s fiscal quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, Bancorp’s internal controls over financial reporting.


PART II - OTHER INFORMATION 

Item 1:      Legal Proceedings

Neither Bancorp nor the Bank has any pending legal proceedings, other than ordinary routine litigation incidental to its business, to which Bancorp or the Bank is a party or any of its property is subject.

Item 1A: Risk Factors

During the three months ended March 31, 2015, there were no material changes to the risk factors relevant to Bancorp’s operations, which are described in the Annual Report on Form 10-K for the year ended December 31, 2014.

Item 6:      Exhibits               

No.Description
 2 Agreement and Plan of Reorganization dated as of June 28, 1999 between Bancorp and the Bank (incorporated by reference to Exhibit 2 to Bancorp’s Current Report on Form 8-K dated December 1, 1999 (Commission File No. 000-29599)).
2.1Securities Purchase Agreement by and among Patriot National Bancorp, Inc., Patriot National Bank and PNBK Holdings LLC dated as of December 16, 2009 (incorporated by reference to Exhibit 10.1 to Bancorp’s Current Report on Form 8-K dated December 17, 2009).
2.2Amendment to Securities Purchase Agreement by and among Patriot National Bancorp, Inc., Patriot National Bank and PNBK Holdings LLC dated as of May 3, 2010 (incorporated by reference to Exhibit 10(a) to Bancorp’s Current Report on Form 8-K dated May 4, 2010).
3(i)Certificate of Incorporation of Bancorp, (incorporated by reference to Exhibit 3(i) to Bancorp’s Current Report on Form 8-K dated December 1, 1999 (Commission File No. 000-29599)).
3(i)(A) (C)Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp Inc. dated July 16, 2004 (incorporated by reference to Exhibit 3(i)(A) to Bancorp’s Annual Report on Form 10- KSB for the year ended December 31, 2004 (Commission File No. 000-29599)).
3(i)(B)Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. dated June 15, 2006 (incorporated by reference to Exhibit 3(i)(B) to Bancorp’s Quarterly Report of Form 10-Q for the quarter ended September 30, 2006 (commission File No. 000-29599)).

No.

Description

3(i)(C)Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. (incorporated(incorporated by reference to Exhibit 3(i) to Bancorp’s current report Form 8-K dated October 21, 2010.
3(ii)Amended and Restated By-laws of Bancorp (incorporated by reference to Exhibit 3(ii) to Bancorp’s Current Report on Form 8-K dated November 1, 2010 (Commission File No. 000-29599))
10(a)(2)2012 Stock Plan of Bancorp (incorporated by reference from Annex A to the Proxy Statement on Form 14C filed November 1, 2011.

10(a)(14)(15)

Change of Control Agreement, dated as of January 1, 2007 among Philip W. Wolford, Patriot National Bank and Bancorp (incorporated by reference to Exhibit 10(a)(14) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 000-29599)).
10(a)(15)

Formal Written Agreement between Patriot National Bank and the Office of the Comptroller of the Currency (incorporated by reference to Exhibit 10(a)(15) to Bancorp’s Current Report on Form 8-K dated February 9, 2009 (Commission File No. 000-29599)).

10(a)(16)(21)Termination of Formal Written Agreement between Patriot National Bank and the Office of the Comptroller of the Currency (incorporated by reference to Exhibit 10(a)(21) to Bancorp’s Current Report on Form 8-K dated October 3, 2014 (Commission File No. 000-29599)).
 
10(a) (16)Formal Written Agreement between Patriot National Bank and the Federal Reserve Bank of New York (incorporated by reference to Exhibit 10(a)(16) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2010 (Commission File No. 000-29599)).
10(a)(17) (22)Financial ServicesTermination of Formal Written Agreement dated November 8, 2011between Patriot National Bank and the Federal Reserve Bank of BancorpNew York (incorporated by reference to Exhibit 10(a)(22) to Bancorp’s Current Report on Form 8-K dated April 27, 2015 (Commission File No. 000-29599)).
10(a) (20)Amended Financial Services Agreement, (incorporated by reference to Exhibit 10(a) (20) on theto Bancorp’s Quarterly Report on Form 10-Q dated November 10, 2011.for the quarter ended June 30, 2014 (Commission File No. 000-29599)).

14

14

Code of Conduct for Senior Financial Officers (incorporated by reference to Exhibit 14 to Bancorp’s Annual Report on Form 10 -KSB for the year ended December 31, 2004 (Commission File No. 000-29599).


No.Description
21Subsidiaries of Bancorp (incorporated by reference to Exhibit 21 to Bancorp’s Annual Report on Form 10-KSB for the year ended December 31, 1999 (Commission File No. 000-29599)).
31(1)Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31(2)Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32Section 1350 Certifications

No.101.INS#

Description

101.INS#XBRL Instance Document

101.SCH#

101.SCH#

XBRL Schema Document

101.CAL#

101.CAL#

XBRL Calculation Linkbase Document

101.LAB#

101.LAB#

XBRL Labels Linkbase Document

101.PRE#

101.PRE#

XBRL Presentation Linkbase Document

101.DEF#

101.DEF#

XBRL Definition Linkbase Document

The exhibits marked with the section symbol (#) are interactive data files. Pursuant to Rule 406T of Regulations S-T, these interactive data files (i) are not deemed filed or part of a registration statement ofor prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, irrespective of any general incorporation language included in any such filings, and otherwise are not subject to liability under these sections; and (ii) are deemed to have complied with Rule 405 of Regulations S-T (“Rule 405”) and are not subject to liability under the anti-fraud provisions of the Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 or under any other liability provision if we have made a good faith attempt to comply with Rule 405 and, after we become aware that the interactive data files fail to comply with Rule 405, we promptly amend the interactive data files.


SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

PATRIOT NATIONAL BANCORP,INC.

PATRIOT NATIONAL BANCORP,INC.(Registrant)
(Registrant)

By:

By:

/s/ Christina L. Maier

Christina L. Maier

 Executive Vice President
 Chief Financial Officer
 (On behalf of the registrant and as

Chief Financial Officer)

May 9, 2014

12, 2015

 

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