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Note 4 - Loan Receivable and Allowance for Loan and Lease Losses

6 Months Ended

Jun. 30, 2021

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 4. Loans Receivable and Allowance for Loan and Lease Losses

As of June 30, 2021 and December 31, 2020, loans receivable, net, consisted of the following:

	June 30,			December 31,
(In thousands)	2021			2020
Loan portfolio segment:
Commercial Real Estate	$	272,854		$	282,378
Residential Real Estate		158,088			153,851
Commercial and Industrial		123,113			144,297
Consumer and Other		51,386			67,635
Construction		46,879			66,984
Construction to Permanent - CRE		18,576			15,035
Loans receivable, gross		670,896			730,180
Allowance for loan and lease losses		(10,362	)		(10,584	)
Loans receivable, net	$	660,534		$	719,596

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

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

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

Commercial Real Estate Loans

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

Residential Real Estate Loans

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

During the three and six months ended June 30, 2021, Patriot purchased $26.7 million and $42.7 million of residential real estate loans, respectively. During the three and six months ended June 30, 2020, Patriot purchased $6.0 million and $14.1 million of residential real estate loans, respectively.

Commercial and Industrial Loans

Patriot’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are generally for the financing of accounts receivable, purchases of inventory, purchases of new or used equipment, or for other short- or long-term working capital purposes. These loans are generally secured by business assets but are also occasionally offered on an unsecured basis. In granting these types of loans, Patriot considers the borrower’s cash flow as the primary source of repayment, supported by the value of collateral, if any, and personal guarantees, as applicable. Repayment of commercial and industrial loans may be negatively impacted by adverse changes in economic conditions, ineffective management, claims on the borrower’s assets by others that are superior to Patriot’s claims, a loss of demand for the borrower’s products or services, or the death or disability of the borrower or other key management personnel.

Patriot’s syndicated and leveraged loan portfolio, which totaled $38.6 million and $55.0 million at June 30, 2021 and December 31, 2020, respectively, are included in the commercial and industrial loan classification and are primarily comprised of loan transactions led by major financial institutions and regional banks, which are the Agent Bank or Lead Arranger, and are referred to as syndicated loans or "Shared National Credits (SNC)". SNC loans were determined to be complementary to the Bank’s existing commercial and industrial loan portfolio and product offerings and provide diversification from Patriot’s typical direct-to-business lines of credit and term facilities.

Consumer and Other Loans

Patriot offers individual consumers various forms of credit including installment loans, credit cards, overdraft protection, auto loans and reserve lines of credit. Repayments of such loans are generally dependent on the personal income of the borrower, which may be negatively impacted by adverse changes in economic conditions. The Company does not place a high emphasis on originating these types of loans.

The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories that are typically characterized by payment delinquencies, previous charge-offs, judgments against the consumer, a history of bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.

During the three and six months ended June 30, 2021, Patriot purchased $2.1 million unsecured consumer loans. During the three and six months ended June 30, 2020, Patriot purchased $0 and $14.9 million education loans, respectively.

Construction Loans

Construction loans are of a short-term nature, generally of eighteen months or less, that are secured by land and improvements intended for commercial, residential, or mixed-use development. Loan proceeds may be used for the acquisition of or improvements to the land under development and funds are generally disbursed as phases of construction are completed.

Included in this category are loans to construct single family homes where no contract of sale exists, based upon the experience and financial strength of the builder, the type and location of the property, and other factors. Construction loans tend to be personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by an inability to complete construction, a downturn in the market for new construction, by a significant increase in interest rates, or by decline in general economic conditions.

Construction to Permanent - Commercial Real Estate (“CRE”)

Loans in this category represent a one-time close of a construction facility with simultaneous conversion to an amortizing mortgage loan. Construction to Permanent loans combine a short term period similar to a construction loan, generally with a variable rate, and a longer term CRE loan typically 10 years, resetting every five years to the Federal Home Loan Bank (“FHLB”) rate.

Close of the construction facility typically occurs when events dictate, such as receipt of a certificate of occupancy and property stabilization, which is defined as cash flow sufficient to support a pre-defined minimum debt coverage ratio and other conditions and covenants particular to the loan. Construction facilities are typically variable rate instruments that, upon conversion to an amortizing mortgage loan, reset to a fixed rate instrument that is the greater of the in-force variable rate plus a predetermined spread over a reference rate (e.g., prime) or a minimum interest rate.

SBA Loans

Patriot originates SBA 7(a) loans, on which the SBA has historically provided guarantees of 75% to 90% of the principal balance. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the unguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory, or commercial real estate and for other business purposes. Loans are guaranteed by the businesses' major owners. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. SBA loans held for investment are included in the commercial real estate loans and commercial and industrial loan classifications, which totaled $22.9 million and $21.6 million as of June 30, 2021 and December 31, 2020, respectively. During the six-month period ended June 30, 2021, $281,000 SBA loans previously classified as held for sale were transferred to held for investment.

Small Business Administration Paycheck Protection Program

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

Paycheck Protection Program loans totaled $2.9 million as of June 30, 2021, which are included in the commercial and industrial loan classifications.

Allowance for Loan and Lease Losses

The following tables summarize the activity in the allowance for loan and lease losses, allocated to segments of the loan portfolio, for the three and six months ended June 30, 2021 and 2020:

(In thousands)	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer and Other			Construction			Construction to Permanent - CRE		Unallocated		Total
Three months ended June 30, 2021
Allowance for loan and lease losses:
March 31, 2021	$	4,154		$	1,909		$	3,624		$	382		$	280		$	77	$	-	$	10,426
Charge-offs		(9	)		-			-			(2	)		(69	)		-		-		(80	)
Recoveries		-			-			12			4			-			-		-		16
Provisions (credits)		(66	)		94			(424	)		7			158			67		164		-
June 30, 2021	$	4,079		$	2,003		$	3,212		$	391		$	369		$	144	$	164	$	10,362

Three months ended June 30, 2020
Allowance for loan and lease losses:
March 31, 2020	$	4,150		$	1,120		$	4,390		$	534		$	603		$	119	$	-	$	10,916
Charge-offs		-			(12	)		(679	)		-			-			-		-		(691	)
Recoveries		-			-			11			2			-			-		-		13
Provisions (credits)		124			802			(196	)		(2	)		63			30		89		910
June 30, 2020	$	4,274		$	1,910		$	3,526		$	534		$	666		$	149	$	89	$	11,148

(In thousands)	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer and Other			Construction			Construction to Permanent - CRE			Unallocated			Total
Six months ended June 30, 2021
Allowance for loan and lease losses:
December 31, 2020	$	4,485		$	1,379		$	3,284		$	295		$	739		$	162		$	240		$	10,584
Charge-offs		(51	)		(3	)		(209	)		(20	)		(69	)		-			-			(352	)
Recoveries		-			-			24			106			-			-			-			130
Provisions (credits)		(355	)		627			113			10			(301	)		(18	)		(76	)		-
June 30, 2021	$	4,079		$	2,003		$	3,212		$	391		$	369		$	144		$	164		$	10,362

Six months ended June 30, 2020
Allowance for loan and lease losses:
December 31, 2019	$	3,789		$	1,038		$	4,340		$	341		$	477		$	130		$	-		$	10,115
Charge-offs		-			(13	)		(683	)		(39	)		-			-			-			(735	)
Recoveries		-			-			51			3			-			-			-			54
Provisions (credits)		485			885			(182	)		229			189			19			89			1,714
June 30, 2020	$	4,274		$	1,910		$	3,526		$	534		$	666		$	149		$	89		$	11,148

The following tables summarize, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for impairment as of June 30, 2021 and December 31, 2020:

(In thousands)	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Construction		Construction to Permanent - CRE		Unallocated		Total
June 30, 2021
Allowance for loan and lease losses:
Individually evaluated for impairment	$	1,252	$	5	$	396	$	-	$	-	$	-	$	-	$	1,653
Collectively evaluated for impairment		2,827		1,998		2,816		391		369		144		164		8,709
Total allowance for loan and lease losses	$	4,079	$	2,003	$	3,212	$	391	$	369	$	144	$	164	$	10,362

Loans receivable, gross:
Individually evaluated for impairment	$	16,964	$	4,200	$	6,406	$	527	$	-	$	-	$	-	$	28,097
Collectively evaluated for impairment		255,890		153,888		116,707		50,859		46,879		18,576		-		642,799
Total loans receivable, gross	$	272,854	$	158,088	$	123,113	$	51,386	$	46,879	$	18,576	$	-	$	670,896

(In thousands)	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Construction		Construction to Permanent - CRE		Unallocated		Total
December 31, 2020
Allowance for loan and lease losses:
Individually evaluated for impairment	$	1,398	$	4	$	-	$	10	$	-	$	-	$	-	$	1,412
Collectively evaluated for impairment		3,087		1,375		3,284		285		739		162		240		9,172
Total allowance for loan losses	$	4,485	$	1,379	$	3,284	$	295	$	739	$	162	$	240	$	10,584

Loans receivable, gross:
Individually evaluated for impairment	$	14,534	$	3,962	$	4,700	$	1,187	$	-	$	-	$	-	$	24,383
Collectively evaluated for impairment		267,844		149,889		139,597		66,448		66,984		15,035		-		705,797
Total loans receivable, gross	$	282,378	$	153,851	$	144,297	$	67,635	$	66,984	$	15,035	$	-	$	730,180

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

Patriot employs a risk rating system as part of the risk assessment of its loan portfolio. At origination, lending officers are required to assign a risk rating to each loan in their portfolio, which is ratified or modified by the Loan Committee to which the loan is submitted for approval. If financial developments occur on a loan in the lending officer’s portfolio of responsibility, the risk rating is reviewed and adjusted, as applicable. In carrying out its oversight responsibilities, the Loan Committee can adjust a risk rating based on available information. In addition, the risk ratings on all commercial loans over $250,000 are reviewed annually by the Credit Department.

Additionally, Patriot retains an independent third-party loan review expert to perform a semi-annual analysis of the results of its risk rating process. The review is based on a randomly selected sample of loans within established parameters (e.g., value, concentration), in order to assess and validate the risk ratings assigned to individual loans. Any changes to the assigned risk ratings, based on the quarterly review, are required to be approved by the Loan Committee.

When assigning a risk rating to a loan, management utilizes the Bank’s internal eleven-point risk rating system. An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the Company to sufficient risk to warrant classification in one of the following categories:

●

Substandard: An asset is classified “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets have well defined weaknesses based on objective evidence, and are characterized by the distinct possibility that the Company will sustain some loss, if noted deficiencies are not corrected.

●

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

Charge-offs of loans to reduce the loan to its recoverable value that are solely collateral dependent, generally occur immediately upon confirmation of the partial loss amount. Loans that are cash flow dependent are modeled to reflect the expected cash flows through expected loan maturity, including any proceeds from refinancing or principal curtailment. A specific reserve is established for the amount by which the net investment in the loan exceeds the present value of discounted cash flows. Charge-offs on cash flow dependent loans also generally occur immediately upon confirmation of the partial loss amount.

If either type of loan is classified as “Loss”, meaning full loss on the loan is expected, the full balance of the loan receivable is charged off, regardless of the potential recovery from a sale of the underlying collateral. Any amount that may be recovered on the sale of collateral underlying a loan is recognized as a “recovery” in the period in which the collateral is sold. In accordance with Federal Financial Institutions Examination Council published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” and “Closed-end” credits are charged off when 180 days and 120 days delinquent, respectively.

Due to the economic disruption and uncertainty caused by the pandemic, the allowance for loan losses may increase in future periods as borrowers are affected by the expected severe contraction of economic activity and the dramatic increase in unemployment. This may result in increases in loan delinquencies, down-grades of loan credit ratings and charge-offs in future periods. The allowance for loan losses may increase to reflect the decline in the performance of the loan portfolio and the higher level of incurred losses.

Allowance for loan losses methodology

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

● Changes in lending policies and procedures, including underwriting standards, collection,

charge-off, and recovery practices not considered elsewhere in estimating credit losses;

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

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

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

● Changes in the volume and loss severity of past due loans, the volume of non-accrual loans,

and the volume and loss severity of adversely classified or graded loans;

● Changes in the quality of the loan review system;

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

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

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

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

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

Loan Portfolio Aging Analysis

The following tables summarize performing and non-performing (i.e., non-accruing) loans receivable by portfolio segment, by aging category, by delinquency status as of June 30, 2021.

(In thousands)	Performing (Accruing) Loans
As of June 30, 2021:	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Performing Loans		Non-accruing Loans		Loans Receivable Gross
Loan portfolio segment:
Commercial Real Estate:
Pass	$	150	$	447	$	-	$	597	$	224,736	$	225,333	$	-	$	225,333
Special mention		-		-		-		-		18,659		18,659		-		18,659
Substandard		-		506		-		506		11,392		11,898		16,964		28,862
		150		953		-		1,103		254,787		255,890		16,964		272,854
Residential Real Estate:
Pass	$	637	$	-	$	605		1,242	$	148,684		149,926		-		149,926
Special mention		-		-		-		-		3,804		3,804		-		3,804
Substandard		-		-		-		-		-		-		4,358		4,358
		637		-		605		1,242		152,488		153,730		4,358		158,088
Commercial and Industrial:
Pass	$	198	$	-	$	-		198	$	88,587		88,785		-		88,785
Special mention		-		-		-		-		6,749		6,749		-		6,749
Substandard		930		4,531		-		5,461		18,967		24,428		3,151		27,579
		1,128		4,531		-		5,659		114,303		119,962		3,151		123,113
Consumer and Other:
Pass	$	1	$	1	$	3		5	$	51,210		51,215		-		51,215
Substandard		-		-		-		-		120		120		51		171
		1		1		3		5		51,330		51,335		51		51,386
Construction:
Pass	$	-	$	5,760	$	-		5,760	$	41,119		46,879		-		46,879
		-		5,760		-		5,760		41,119		46,879		-		46,879
Construction to Permanent - CRE:
Pass	$	-	$	-	$	-		-	$	18,576		18,576		-		18,576
		-		-		-		-		18,576		18,576		-		18,576

Total	$	1,916	$	11,245	$	608	$	13,769	$	632,603	$	646,372	$	24,524	$	670,896

Loans receivable, gross:
Pass	$	986	$	6,208	$	608	$	7,802	$	572,912	$	580,714	$	-	$	580,714
Special mention		-		-		-		-		29,212		29,212		-		29,212
Substandard		930		5,037		-		5,967		30,479		36,446		24,524		60,970
Loans receivable, gross	$	1,916	$	11,245	$	608	$	13,769	$	632,603	$	646,372	$	24,524	$	670,896

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

(In thousands)	Performing (Accruing) Loans
As of December 31, 2020:	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Performing Loans		Non-accruing Loans		Loans Receivable Gross
Loan portfolio segment:
Commercial Real Estate:
Pass	$	-	$	-	$	-	$	-	$	230,824	$	230,824	$	-	$	230,824
Special mention		-		-		-		-		25,658		25,658		-		25,658
Substandard		354		-		9		363		10,999		11,362		14,534		25,896
		354		-		9		363		267,481		267,844		14,534		282,378
Residential Real Estate:
Pass		478		361		-		839		145,298		146,137		-		146,137
Special mention		-		-		-		-		3,860		3,860		-		3,860
Substandard		-		-		-		-		-		-		3,854		3,854
		478		361		-		839		149,158		149,997		3,854		153,851
Commercial and Industrial:
Pass		-		209		-		209		102,131		102,340		-		102,340
Special mention		-		4,000		-		4,000		8,881		12,881		-		12,881
Substandard		603		113		-		716		27,660		28,376		700		29,076
		603		4,322		-		4,925		138,672		143,597		700		144,297
Consumer and Other:
Pass		1		-		7		8		66,589		66,597		-		66,597
Substandard		-		-		-		-		121		121		917		1,038
		1		-		7		8		66,710		66,718		917		67,635
Construction:
Pass		-		2,351		-		2,351		64,633		66,984		-		66,984
		-		2,351		-		2,351		64,633		66,984		-		66,984
Construction to Permanent - CRE:
Pass		-		-		-		-		15,035		15,035		-		15,035
		-		-		-		-		15,035		15,035		-		15,035

Total	$	1,436	$	7,034	$	16	$	8,486	$	701,689	$	710,175	$	20,005	$	730,180

Loans receivable, gross:
Pass	$	479	$	2,921	$	7	$	3,407	$	624,510	$	627,917	$	-	$	627,917
Special mention		-		4,000		-		4,000		38,399		42,399		-		42,399
Substandard		957		113		9		1,079		38,780		39,859		20,005		59,864
Loans receivable, gross	$	1,436	$	7,034	$	16	$	8,486	$	701,689	$	710,175	$	20,005	$	730,180

The following tables summarize non-performing (i.e., non-accruing) loans by aging category and status, within the applicable loan portfolio segment as of June 30, 2021 and December 31, 2020:

(In thousands)	Non-accruing Loans
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Non-accruing Loans
As of June 30, 2021:
Loan portfolio segment:
Commercial Real Estate:
Substandard	$	-	$	-	$	4,649	$	4,649	$	12,315	$	16,964
Residential Real Estate:
Substandard		-		124		2,105		2,229		2,129		4,358
Commercial and Industrial:
Substandard		509		1,231		1,359		3,099		52		3,151
Consumer and Other:
Substandard		-		-		30		30		21		51
Total non-accruing loans	$	509	$	1,355	$	8,143	$	10,007	$	14,517	$	24,524

As of December 31, 2020:
Loan portfolio segment:
Commercial Real Estate:
Substandard	$	-	$	-	$	5,723	$	5,723	$	8,811	$	14,534
Residential Real Estate:
Substandard		-		-		2,884		2,884		970		3,854
Commercial and Industrial:
Substandard		-		-		700		700		-		700
Consumer and Other:
Substandard		22		-		91		113		804		917
Total non-accruing loans	$	22	$	-	$	9,398	$	9,420	$	10,585	$	20,005

If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $154,000 and $409,000 would have been recognized during the three and six months ended June 30, 2021, respectively. During the three and six months ended June 30, 2020, additional interest income (net of cash collected) of approximately $284,000 and $475,000 would have been recognized, respectively.

Interest income collected and recognized on non-accruing loans for the three and six months ended June 30, 2021 and 2020 was $77,000 and $121,000, respectively. During the three and six months ended June 30, 2020, interest income collected and recognized on non-accruing loans was $57,000 and $84,000, respectively

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

All interest accrued, but not collected for loans that are placed on non-accrual status or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, future payments are reasonably assured, after at least six months of timely payment history. Management considers all non-accrual loans and Trouble Debt Restructurings (“TDR”) for impaired loans. In most cases, loan payments that are past due less than 90 days, well-secured, and in the process of collection are not considered impaired. The Bank considers loans under $100,000 and consumer installment loans to be pools of smaller homogeneous loan balances, and therefore are collectively evaluated for impairment, and not individually measured for impairment.

Troubled Debt Restructurings (“TDR”)

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

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

The following table summarizes the recorded investment in TDRs as of June 30, 2021 and December 31, 2020:

(In thousands)	June 30, 2021					December 31, 2020
Loan portfolio segment:	Number of Loans		Recorded Investment			Number of Loans		Recorded Investment
Commercial Real Estate		1	$	8,811			2	$	9,884
Residential Real Estate		3		899			3		928
Commercial and Industrial		1		4,000			1		4,000
Consumer and Other		3		647			5		1,074
Total TDR Loans		8		14,357			11		15,886
Less:
TDRs included in non-accrual loans		2		(9,548	)		6		(11,508	)
Total accrual TDR Loans		6	$	4,809			5	$	4,378

During the three and six months ended June 30, 2021, no loans were modified as TDRs.

The following loans were modified as TDRs during the three and six month ended June 30, 2020:

(In thousands)			Outstanding Recorded Investment
Three and Six Months Ended June 30, 2020	Number of Loans		Pre-Modification		Post-Modification
Loan portfolio segment:
Commercial Real Estate		1	$	57	$	56
Consumer and Other		2		121		121
Total TDR Loans		3	$	178	$	177

The loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, extending the interest-only payment period, or substituting or adding a co-borrower or guarantor. There were no defaults of TDRs during the three and six months ended June 30, 2021 and 2020. At June 30, 2021 and December 31, 2020, there were no commitments to advance additional funds under TDRs.

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

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2021 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2021. In addition, on April 7, 2020, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs. The Bank had modified $232.7 million of loans to borrowers to defer the payment of interest and/or principal for up to 180 days, and approximately $21.3 million of loans remained on deferment as of June 30, 2021. According to regulatory guidance and CARES Act, these modified loans were not TDRs as of June 30, 2021.

Impaired Loans

The following table reflects information about the impaired loans by class as of June 30, 2021 and December 31, 2020:

(In thousands)	June 30, 2021						December 31, 2020
	Recorded Investment		Principal Outstanding		Related Allowance		Recorded Investment		Principal Outstanding		Related Allowance
With no related allowance recorded:
Commercial Real Estate	$	8,153	$	9,112	$	-	$	5,723	$	6,644	$	-
Residential Real Estate		4,092		4,196		-		3,853		3,900		-
Commercial and Industrial		4,666		4,788		-		4,700		4,816		-
Consumer and Other		527		527		-		1,177		1,332		-
		17,438		18,623		-		15,453		16,692		-
With a related allowance recorded:
Commercial Real Estate	$	8,811	$	8,811	$	1,252		8,811		8,811		1,398
Residential Real Estate		427		446		9		109		109		4
Commercial and Industrial		2,485		2,592		401		-		-		-
Consumer and Other		172		204		2		10		10		10
		11,895		12,053		1,664		8,930		8,930		1,412

Impaired Loans, Total:
Commercial Real Estate		16,964		17,923		1,252		14,534		15,455		1,398
Residential Real Estate		4,519		4,642		9		3,962		4,009		4
Commercial and Industrial		7,151		7,380		401		4,700		4,816		-
Consumer and Other		699		731		2		1,187		1,342		10
Impaired Loans, Total	$	29,333	$	30,676	$	1,664	$	24,383	$	25,622	$	1,412

The following tables summarize additional information regarding impaired loans by class for the three and six months ended June 30, 2021 and 2020.

	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2021				2020				2021				2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	8,188	$	39	$	6,256	$	13	$	6,979	$	39	$	5,170	$	26
Residential Real Estate		4,276		16		3,565		13		4,280		29		3,585		33
Commercial and Industrial		4,741		25		1,985		2		3,608		71		2,031		2
Consumer and Other		713		1		1,152		9		854		6		1,049		17
		17,918		81		12,958		37		15,721		145		11,835		78
With a related allowance recorded:
Commercial Real Estate		8,813		-		8,866		34		8,812		-		8,841		35
Residential Real Estate		270		5		55		1		201		8		31		3
Commercial and Industrial		2,031		32		-		-		1,161		58		-		-
Consumer and Other		86		2		88		1		50		3		51		2
		11,200		39		9,009		36		10,224		69		8,923		40
Impaired Loans, Total:
Commercial Real Estate		17,001		39		15,122		47		15,791		39		14,011		61
Residential Real Estate		4,546		21		3,620		14		4,481		37		3,616		36
Commercial and Industrial		6,772		57		1,985		2		4,769		129		2,031		2
Consumer and Other		799		3		1,240		10		904		9		1,100		19
Impaired Loans, Total	$	29,118	$	120	$	21,967	$	73	$	25,945	$	214	$	20,758	$	118

Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs. As of June 30, 2021, based on the ongoing monitoring and analysis of the loan portfolio, thirty-four loans were identified as impaired, with a total recorded balance of $29.3 million for which $1.7 million specific reserves were established. Twenty-one out of thirty-four impaired loans were individually evaluated for impairment, and the remaining ten impaired loans with balances under $100,000, were collectively evaluated, and not individually evaluated for impairment.

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

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

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