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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
__________________________

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

For the quarterly period ended March 31, 2023
OR

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

For the transition period from _______ to _______
Commission file number 000-29599
PATRIOT NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)

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

(203) 252-5900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act

Large accelerated filer |  | o |  | Accelerated filer |  | o
Non-accelerated filer |  | x |  | Smaller reporting company |  | x
Emerging growth company |  | o |  |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of May 12, 2023, there were 3,965,186 shares of the registrant’s common stock outstanding.

1

Table of Contents
T ABLE OF C ONTENTS

Table of Contents | 2
PART I- FINANCIAL INFORMATION | 3
Item 1: Consolidated Financial Statements | 3
Consolidated Balance Sheets (Unaudited) | 3
Consolidated Statements of Operations (Unaudited) | 4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) | 5
Consolidated Statements of Shareholder's Equity (Unaudited) | 6
Consolidated Statements of Cash Flows (Unaudited) | 7
Notes to Consolidated Financial Statements (Unaudited) | 9
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations | 41
Item 3: Quantitative and Qualitative Disclosures about Market Risk | 54
Item 4: Disclosure Controls and Procedures | 55
PART II - OTHER INFORMATION | 57
Item 1: Legal Proceedings | 57
Item 5: Other Information | 57
Item 6: Exhibits | 58
SIGNATURES | 59

2

Table of Contents
PART I- FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

| March 31, 2023 |  | December 31, 2022
(In thousands, except share data) | Unaudited |  |
Assets |  |  |
Cash and due from banks: |  |  |
Noninterest bearing deposits and cash | $ | 1,828 |  |  | $ | 5,182 |
Interest bearing deposits | 58,424 |  |  | 33,311 |
Total cash and cash equivalents | 60,252 |  |  | 38,493 |
Investment securities: |  |  |
Available-for-sale securities, at fair value | 91,736 |  |  | 84,520 |
Other investments, at cost | 4,450 |  |  | 4,450 |
Total investment securities | 96,186 |  |  | 88,970 |
Federal Reserve Bank stock, at cost | 2,673 |  |  | 2,627 |
Federal Home Loan Bank stock, at cost | 6,374 |  |  | 3,874 |
Loans receivable (net of allowance for credit losses: 2023: $17,801 and 2022: $10,310) | 860,968 |  |  | 838,006 |
Loans held for sale | 6,882 |  |  | 5,211 |
Accrued interest and dividends receivable | 7,308 |  |  | 7,267 |
Premises and equipment, net | 30,467 |  |  | 30,641 |
Deferred tax asset | 17,392 |  |  | 15,527 |
Goodwill | 1,107 |  |  | 1,107 |
Core deposit intangible, net | 238 |  |  | 249 |
Other assets | 10,165 |  |  | 11,387 |
Total assets | $ | 1,100,012 |  |  | $ | 1,043,359 |
Liabilities |  |  |
Deposits: |  |  |
Noninterest bearing deposits | $ | 152,773 |  |  | $ | 269,636 |
Interest bearing deposits | 703,695 |  |  | 590,810 |
Total deposits | 856,468 |  |  | 860,446 |
Federal Home Loan Bank and correspondent bank borrowings | 150,000 |  |  | 85,000 |
Senior notes, net | 11,619 |  |  | 11,640 |
Subordinated debt, net | 9,847 |  |  | 9,840 |
Junior subordinated debt owed to unconsolidated trust, net | 8,130 |  |  | 8,128 |
Note payable | 533 |  |  | 585 |
Advances from borrowers for taxes and insurance | 2,824 |  |  | 886 |
Accrued expenses and other liabilities | 5,982 |  |  | 7,251 |
Total liabilities | 1,045,403 |  |  | 983,776 |
Commitments and Contingencies |  |  |
Shareholders' equity |  |  |
Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding | — |  |  | — |
Common stock, $.01 par value, 100,000,000 shares authorized; As of March 31, 2023: 4,038,927 shares issued; 3,965,186 shares outstanding; As of December 31, 2022: 4,038,927 shares issued; 3,965,186 shares outstanding. | 106,588 |  |  | 106,565 |
Accumulated deficit | (37,581) |  |  | (31,337) |
Accumulated other comprehensive loss | (14,398) |  |  | (15,645) |
Total shareholders' equity | 54,609 |  |  | 59,583 |
Total liabilities and shareholders' equity | $ | 1,100,012 |  |  | $ | 1,043,359 |

See Accompanying Notes to Consolidated Financial Statements.
3

Table of Contents
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

| Three Months Ended March 31, |  |
(In thousands, except per share amounts) | 2023 |  | 2022 |  |  |  |
Interest and Dividend Income |  |  |  |  |  |  |
Interest and fees on loans | $ | 12,550 |  |  | $ | 7,664 |  |  |  |  |
Interest on investment securities | 680 |  |  | 570 |  |  |  |  |
Dividends on investment securities | 135 |  |  | 65 |  |  |  |  |
Other interest income | 281 |  |  | 21 |  |  |  |  |
Total interest and dividend income | 13,646 |  |  | 8,320 |  |  |  |  |
Interest Expense |  |  |  |  |  |  |
Interest on deposits | 3,579 |  |  | 409 |  |  |  |  |
Interest on Federal Home Loan Bank borrowings | 1,373 |  |  | 737 |  |  |  |  |
Interest on senior debt | 290 |  |  | 210 |  |  |  |  |
Interest on subordinated debt | 326 |  |  | 234 |  |  |  |  |
Interest on note payable and other | 65 |  |  | 4 |  |  |  |  |
Total interest expense | 5,633 |  |  | 1,594 |  |  |  |  |
Net interest income | 8,013 |  |  | 6,726 |  |  |  |  |
Provision for credit losses | 1,336 |  |  | — |  |  |  |  |
Net interest income after provision for credit losses | 6,677 |  |  | 6,726 |  |  |  |  |
Non-interest Income |  |  |  |  |  |  |
Loan application, inspection and processing fees | 123 |  |  | 87 |  |  |  |  |
Deposit fees and service charges | 68 |  |  | 64 |  |  |  |  |
Gains on sales of loans | 81 |  |  | 208 |  |  |  |  |
Rental income | 119 |  |  | 192 |  |  |  |  |
Gain on sale of investment securities | 24 |  |  | — |  |  |  |  |
Other income | 420 |  |  | 263 |  |  |  |  |
Total non-interest income | 835 |  |  | 814 |  |  |  |  |
Non-interest Expense |  |  |  |  |  |  |
Salaries and benefits | 4,267 |  |  | 3,346 |  |  |  |  |
Occupancy and equipment expense | 884 |  |  | 836 |  |  |  |  |
Data processing expense | 294 |  |  | 330 |  |  |  |  |
Professional and other outside services | 914 |  |  | 789 |  |  |  |  |
Project expenses, net | 27 |  |  | 52 |  |  |  |  |
Advertising and promotional expense | 85 |  |  | 68 |  |  |  |  |
Loan administration and processing expense | 51 |  |  | 105 |  |  |  |  |
Regulatory assessments | 182 |  |  | 174 |  |  |  |  |
Insurance expense, net | 77 |  |  | 77 |  |  |  |  |
Communications, stationary and supplies | 191 |  |  | 135 |  |  |  |  |
Other operating expense | 612 |  |  | 517 |  |  |  |  |
Total non-interest expense | 7,584 |  |  | 6,429 |  |  |  |  |
(Loss) income before income taxes | (72) |  |  | 1,111 |  |  |  |  |
(Benefit) provision for income taxes | (19) |  |  | 311 |  |  |  |  |
Net (loss) income | $ | (53) |  |  | $ | 800 |  |  |  |  |
Basic (loss) earnings per share | $ | (0.01) |  |  | $ | 0.20 |  |  |  |  |
Diluted (loss) earnings per share | $ | (0.01) |  |  | $ | 0.20 |  |  |  |  |

See Accompanying Notes to Consolidated Financial Statements.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In thousands) | Three Months Ended March 31, |  |
| 2023 |  | 2022 |  |  |  |
Net (loss) income | $ | (53) |  |  | $ | 800 |  |  |  |  |
Other comprehensive income (loss) |  |  |  |  |  |  |
Unrealized holding gain (loss) on securities | 1,704 |  |  | (7,389) |  |  |  |  |
Income tax effect | (439) |  |  | 1,907 |  |  |  |  |
Reclassification for realized gain on sale of investment securities | (24) |  |  | — |  |  |  |  |
Income tax effect | 6 |  |  | — |  |  |  |  |
Total securities available-for-sale | 1,247 |  |  | (5,482) |  |  |  |  |
Comprehensive income (loss) | $ | 1,194 |  |  | $ | (4,682) |  |  |  |  |

See Accompanying Notes to Consolidated Financial Statements.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

| Three Months Ended March 31, 2023
(In thousands, except shares) | Number of Shares |  | Common Stock |  | Accumulated Deficit |  | Accumulated Other Comprehensive (Loss) Income |  | Total
Balance at January 1, 2023 | 3,965,186 |  | $ | 106,565 |  |  | $ | (31,337) |  |  | $ | (15,645) |  |  | $ | 59,583 |
Transition adjustment related to adoption of ASC 326, net of tax | — |  | — |  | (6,191) |  |  | — |  | (6,191) |
Comprehensive (loss) income: |  |  |  |  |  |  |  |  |
Net (loss) income | — |  | — |  |  | (53) |  |  | — |  |  | (53) |
Unrealized holding gain on available-for-sale securities, net of tax | — |  | — |  |  | — |  |  | 1,247 |  |  | 1,247 |
Total comprehensive (loss) income | — |  | — |  |  | (53) |  |  | 1,247 |  |  | 1,194 |
Share-based compensation expense | — |  | 23 |  |  | — |  |  | — |  |  | 23 |
Balance at March 31, 2023 | 3,965,186 |  | $ | 106,588 |  |  | $ | (37,581) |  |  | $ | (14,398) |  |  | $ | 54,609 |

| Three Months Ended March 31, 2022
(In thousands, except shares) | Number of Shares |  | Common Stock |  | Accumulated Deficit |  | Accumulated Other Comprehensive (Loss) Income |  | Total
Balance at January 1, 2022 | 3,956,492 |  | $ | 106,479 |  |  | $ | (37,498) |  |  | $ | (1,637) |  |  | $ | 67,344 |
Comprehensive income (loss): |  |  |  |  |  |  |  |  |
Net income | — |  | — |  |  | 800 |  |  | — |  |  | 800 |
Unrealized holding loss on available-for-sale securities, net of tax | — |  | — |  |  | — |  |  | (5,482) |  |  | (5,482) |
Total comprehensive income (loss) | — |  | — |  |  | 800 |  |  | (5,482) |  |  | (4,682) |
Share-based compensation expense | — |  | 21 |  |  | — |  |  | — |  |  | 21 |
Vesting of restricted stock | — |  | — |  |  | — |  |  | — |  |  | — |
Balance at March 31, 2022 | 3,956,492 |  | $ | 106,500 |  |  | $ | (36,698) |  |  | $ | (7,119) |  |  | $ | 62,683 |

See Accompanying Notes to Consolidated Financial Statements.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands) | Three Months Ended March 31,
| 2023 |  | 2022
Cash Flows from Operating Activities: |  |  |
Net (loss) income | $ | (53) |  |  | $ | 800 |
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |  |  |
Amortization and accretion of investment premiums and discounts, net | (23) |  |  | (17) |
Amortization and accretion of purchase loan premiums and discounts, net | 698 |  |  | 639 |
Amortization of debt issuance costs | 44 |  |  | 9 |
Amortization of core deposit intangible | 11 |  |  | 12 |
Amortization of servicing assets of sold SBA loans | 27 |  |  | 10 |
Provision for credit losses | 1,336 |  |  | — |
Depreciation and amortization | 275 |  |  | 323 |
Gain on sales of available-for-sale securities | (24) |  |  | — |
Share-based compensation | 23 |  |  | 21 |
(Increase) decrease in deferred income taxes, net | (23) |  |  | 298 |
Originations of SBA loans held for sale | (3,218) |  |  | (5,057) |
Proceeds from sale of SBA loans held for sale | 1,628 |  |  | 2,574 |
Gains on sale of SBA loans held for sale, net | (81) |  |  | (208) |
Changes in assets and liabilities: |  |  |
(Increase) decrease in accrued interest and dividends receivable | (41) |  |  | 226 |
Decrease (increase) in other assets | 1,003 |  |  | (2,520) |
Decrease in accrued expenses and other liabilities | (1,794) |  |  | (1,430) |
Net cash used in operating activities | (212) |  |  | (4,320) |
Cash Flows from Investing Activities: |  |  |
Proceeds from maturity or sales on available-for-sale securities | 1,780 |  |  | 2,500 |
Principal repayments on available-for-sale securities | 1,074 |  |  | 2,209 |
Purchases of available-for-sale securities | (8,343) |  |  | (1,000) |
Redemptions (purchases) of Federal Reserve Bank stock | (46) |  |  | (26) |
Purchases of Federal Home Loan Bank stock | (2,500) |  |  | — |
Origination of loans receivable | (48,490) |  |  | (42,570) |
Purchases of loans receivable | (10,623) |  |  | (39,022) |
Payments received on loans receivable | 26,309 |  |  | 46,882 |
Purchases of premises and equipment | (98) |  |  | (91) |
Proceeds from sale of other real estate owned | — |  |  | — |
Net cash used in investing activities | (40,937) |  |  | (31,118) |
Cash Flows from Financing Activities: |  |  |
(Decrease) increase in deposits, net | (3,978) |  |  | 31,287 |
Increase in FHLB borrowings | 65,000 |  |  | — |
Principal repayments of note payable | (52) |  |  | (51) |
Decrease in advances from borrowers for taxes and insurance | 1,938 |  |  | 1,473 |
Net cash provided by financing activities | 62,908 |  |  | 32,709 |
Net increase (decrease) in cash and cash equivalents | 21,759 |  |  | (2,729) |
Cash and cash equivalents at beginning of period | 38,493 |  |  | 47,045 |
Cash and cash equivalents at end of period | $ | 60,252 |  |  | $ | 44,316 |

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

(In thousands) | Three Months Ended March 31,
| 2023 |  | 2022
Supplemental Disclosures of Cash Flow Information: |  |  |
Cash paid for interest | $ | 5,438 |  |  | $ | 1,247 |
Cash refund from income taxes | $ | (2) |  |  | $ | — |
Non-cash transactions: |  |  |
Capitalized servicing assets | $ | 34 |  |  | $ | 52 |
Transfers of loans held for sale to loans receivable | $ | — |  |  | $ | — |
Operating lease right-of-use assets | $ | — |  |  | $ | 61 |
Decrease in interest rate swaps | $ | (97) |  |  | $ | (405) |
Capital raise deferred costs | $ | — |  |  | $ | 863 |
Expected credit loss for loans - ASC 362 adoption | $ | 7,372 |  |  | $ | — |
Expected credit loss for unfunded commitments - ASC 362 adoption | $ | 1,094 |  |  | $ | — |
Deferred tax assets - ASC 362 adoption | $ | (2,275) |  |  | $ | — |

See Accompanying Notes to Consolidated Financial Statements.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 1. Basis of Financial Statement Presentation
The accompanying unaudited interim condensed consolidated financial statements of Patriot National Bancorp, Inc. (the “Company” or “PNBK”) and its wholly-owned subsidiaries, Patriot Bank, N.A. (the “Bank”), Patriot National Statutory Trust I and PinPat Acquisition Corporation (collectively, “Patriot”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included on the Annual Report on Form 10-K for the year ended December 31, 2022.
The consolidated balance sheet at December 31, 2022 presented herein has been derived from the audited consolidated financial statements of the Company at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statements.
The preparation of consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified accounting for the allowance for loan and lease losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets, the impairment of goodwill, the valuation of derivatives, and the valuation of servicing assets as certain of the Company’s more significant accounting policies and estimates, in that they are critical to the presentation of the Company’s consolidated financial condition and results of operations. As they concern matters that are inherently uncertain, these estimates require management to make subjective and complex judgments in the preparation of the Company’s consolidated financial statements.
The information furnished reflects, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations that may be expected for the remainder of 2023.
Certain prior period amounts have been reclassified to conform to current year presentation.
Note 2. Summary of Significant Accounting Policies
Please refer to the summary of Significant Accounting Policies included in the Company’s 2022 Annual Report on Form 10-K for a list of all policies in effect as of December 31, 2022.
Allowance for Credit Losses (“ACL”) and Impairment of Debt Securities
As described below under Recently Adopted Accounting Pronouncements, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) Accounting Standard Codification (“ASC”) 326 effective January 1, 2023.
Impairment of Debt Securities Available for Sale
For available-for-sale debt securities in an unrealized loss position, the Company will first assess whether i) it intends to sell or ii) it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. If either case is applicable, any previously recognized allowances are charged off and the debt security’s amortized cost is written down to fair value through income. If neither case is applicable, the debt security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the debt security by a rating agency and any adverse conditions specifically related to the debt security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the debt security are compared to the amortized cost basis of the debt security. If the present value of cash flows expected to be collected is less than the
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount by which the fair value is less than the amortized cost basis. Any impairment that has not been recorded through allowance for credit losses is recognized in other comprehensive income, net of tax.
Adjustments to the allowance are reported in the income statement as a component of credit loss expense. Debt securities are charged off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by the Company or when either of the aforementioned criteria regarding intent or requirement to sell is met specifically for available-for-sale debt securities.
The Company excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on debt securities and does not record an ACL on accrued interest receivable.
ACL – Loans
The ACL is based on the Company’s evaluation of the loan portfolios, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The process is inherently subjective and subject to significant change as it requires material estimates. The allowance is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recoveries. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for credit losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
The Company evaluates loans with similar risk characteristics in pools using a probability of default/loss given default (PD/LGD) method. Unlike the previous allowance for loan losses approach, which applied historical loss rates to similar loan pools, the CECL methodology forecasts the probability of default, loss given default, and exposure at default for loans in a given pool over their remaining life. This allows the Company to derive an ACL that can absorb estimated losses over the remaining life of the portfolio.
Qualitative factors play a greatly diminished role under the Company's CECL framework as reserve rates for the model in use are influenced by change in: real domestic Gross Domestic Product (GDP); State of Connecticut unemployment rate; New York Fed recession indicator; CoStar composite index; New York Case Schiller index; Coincident activity index; Michigan consumer activity index; S&P's BBB credit spreads; the Company's loan delinquencies and charge off data.
Credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis. Individual evaluations are performed for nonaccrual loans and loans rated substandard that are in excess of $100,000. Specific allowances were estimated based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.
The Company measures expected credit losses over the contractual term of a loan, adjusted for estimated prepayments. The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed. Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding, purchase discounts and premiums and deferred loan fees and costs. Accrued interest receivable on loans is excluded from the estimate of credit losses.
ACL – Unfunded Loan Commitments
The ACL is a liability account representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if the Company has the unconditional right to cancel the obligation. The ACL is reported as a component of other liabilities within the Consolidated Balance Sheets. Adjustments to the ACL for unfunded commitments are reported in the Consolidated Income Statements as a component of provision for credit losses.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Recently Issued Accounting Standards
New Accounting Standards Adopted in 2023
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU changes the methodology for measuring credit losses on financial instruments measured at amortized cost to a current expected loss (“CECL”) model. Under the CECL model, entities are required to estimate credit losses over the entire contractual term of a financial instrument from the date of initial recognition of the instrument. The ASU also changes the existing impairment model for available-for-sale debt securities. In cases where there is neither the intent nor a more-likely-than-not requirement to sell the debt security, an entity should record credit losses as an allowance rather than a direct write-down of the amortized cost basis. Additionally, ASU 2016-13 notes that credit losses related to available-for-sale debt securities and purchased credit impaired loans should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018. In November 2019, the FASB issued ASU 2019-10, which amends the effective date of ASC 326 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities, and delays the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a small reporting company, the delay was applicable to the Company. The Company adopted ASC 326 effective January 1, 2023, the Company recorded an increase to the allowance for credit losses of $7.4 million and an increase to reserve for unfunded commitments of $1.1 million (which is included in other liabilities on the Company’s consolidated balance sheets), and a cumulative-effect adjustment to increase the opening balance of accumulated deficit of $6.2 million, net of $2.3 million tax at the date of adoption.
ASU Update 2020-02
In January 2020, the FASB issued ASU No. 2020-02, “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. The Company adopted ASC 326 effective January 1, 2023.
ASU Update 2020-03
In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments.” This ASU clarifies various financial instruments topics, including the CECL standard issued in 2016. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Other amendments are effective upon issuance of this ASU. See the discussion regarding the adoption of ASU 2016-13 above.
ASU 2022-02
In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings ("TDR") and Vintage Disclosures". ASU 2022-02 updates guidance in Topic 326, to eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty and to require entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted if an entity has adopted the amendments in Update 2016-03, including adoption in an interim period. The Company adopted ASC 326 effective January 1, 2023. The adoption of this guidance did not have any material impact on the Company's consolidated financial statements.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
ASU 2022-06
On December 21, 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) “Deferral of the Sunset Date of Topic 848” This ASU defers the sunset date of the temporary, optional expedients related to the accounting for contract modifications and hedging transactions as a result of the anticipated transition away from the use of LIBOR and other interbank offered rates to alternative reference rates. In response to the United Kingdom’s Financial Conduct Authority's extension of the cessation date of LIBOR in the United States to June 30, 2023, the FASB has deferred the expiration date of these optional expedients to December 31, 2024. The ASU became effective upon issuance and affords the Company an extended period to utilize the currently available optional expedients related to the accounting for contract modifications and hedging transactions as a result of the anticipated transition away from the use of LIBOR and other inter-bank offered rates. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Note 3. Available-for-Sale Securities
The amortized cost, gross unrealized gains, gross unrealized losses and fair values of available-for-sale securities at March 31, 2023 and December 31, 2022 are as follows:

(In thousands) | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized (Losses) |  | Fair Value
March 31, 2023: |  |  |  |  |  |  |
U. S. Government agency and mortgage-backed securities | $ | 81,084 |  |  | $ | 4 |  |  | $ | (13,551) |  |  | $ | 67,537 |
Corporate bonds | 18,010 |  |  | — |  |  | (4,348) |  |  | 13,662 |
Subordinated notes | 5,000 |  |  | — |  |  | (479) |  |  | 4,521 |
SBA loan pools | 6,487 |  |  | — |  |  | (982) |  |  | 5,505 |
Municipal bonds | 560 |  |  | — |  |  | (49) |  |  | 511 |
Total available-for-sale securities | $ | 111,141 |  |  | $ | 4 |  |  | $ | (19,409) |  |  | $ | 91,736 |
December 31, 2022: |  |  |  |  |  |  |
U. S. Government agency and mortgage-backed securities | $ | 73,480 |  |  | $ | — |  |  | $ | (14,434) |  |  | $ | 59,046 |
Corporate bonds | 19,773 |  |  | 7 |  |  | (5,125) |  |  | 14,655 |
Subordinated notes | 5,000 |  |  | — |  |  | (398) |  |  | 4,602 |
SBA loan pools | 6,791 |  |  | — |  |  | (1,073) |  |  | 5,718 |
Municipal bonds | 561 |  |  | — |  |  | (62) |  |  | 499 |
Total available-for-sale securities | $ | 105,605 |  |  | $ | 7 |  |  | $ | (21,092) |  |  | $ | 84,520 |

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The following table presents the available-for-sale securities’ gross unrealized losses and fair value, aggregated by the length of time the individual securities have been in a continuous loss position as of March 31, 2023 and December 31, 2022:

(In thousands) | Less than 12 Months |  | 12 Months or More |  | Total
| Fair Value |  | Unrealized (Loss) |  | Fair Value |  | Unrealized (Loss) |  | Fair Value |  | Unrealized (Loss)
March 31, 2023: |  |  |  |  |  |  |  |  |  |  |
U. S. Government agency and mortgage-backed securities | $ | 15,559 |  |  | $ | (560) |  |  | $ | 48,506 |  |  | $ | (12,991) |  |  | $ | 64,065 |  |  | $ | (13,551) |
Corporate bonds | 1,967 |  |  | (48) |  |  | 11,695 |  |  | (4,300) |  |  | 13,662 |  |  | (4,348) |
Subordinated notes | 2,748 |  |  | (252) |  |  | 1,773 |  |  | (227) |  |  | 4,521 |  |  | (479) |
SBA loan pools | 1,355 |  |  | (13) |  |  | 4,150 |  |  | (969) |  |  | 5,505 |  |  | (982) |
Municipal bonds | — |  |  | — |  |  | 511 |  |  | (49) |  |  | 511 |  |  | (49) |
Total available-for-sale securities | $ | 21,629 |  |  | $ | (873) |  |  | $ | 66,635 |  |  | $ | (18,536) |  |  | $ | 88,264 |  |  | $ | (19,409) |
December 31, 2022: |  |  |  |  |  |  |  |  |  |  |
U. S. Government agency and mortgage-backed securities | $ | 11,126 |  |  | $ | (633) |  |  | $ | 47,920 |  |  | $ | (13,801) |  |  | $ | 59,046 |  |  | $ | (14,434) |
Corporate bonds | 1,959 |  |  | (64) |  |  | 10,934 |  |  | (5,061) |  |  | 12,893 |  |  | (5,125) |
Subordinated notes | 4,602 |  |  | (398) |  |  | — |  |  | — |  |  | 4,602 |  |  | (398) |
SBA loan pools | 1,437 |  |  | (12) |  |  | 4,280 |  |  | (1,061) |  |  | 5,717 |  |  | (1,073) |
Municipal bonds | — |  |  | — |  |  | 498 |  |  | (62) |  |  | 498 |  |  | (62) |
Total available-for-sale securities | $ | 19,124 |  |  | $ | (1,107) |  |  | $ | 63,632 |  |  | $ | (19,985) |  |  | $ | 82,756 |  |  | $ | (21,092) |

As of March 31, 2023 and December 31, 2022, forty-eight of forty-nine and forty-six of forty-seven available-for-sale securities had unrealized losses with an aggregate decline of (18.0)% and (20.3)% from the amortized cost of those securities, respectively.
At March 31, 2023, no allowance for credit losses has been recognized on available for sale debt securities in an unrealized loss position as the Company does not believe any of the debt securities are credit impaired. This is based on the Company’s analysis of the risk characteristics, including credit ratings, and other qualitative factors related to available for sale debt securities. The issuers of these debt securities continue to make timely principal and interest payments under the contractual terms of the securities. The Company does not intend to sell these debt securities and it is more likely than not that the Company will not be required to sell the debt securities before recovery of their amortized cost, which may be at maturity. The unrealized losses are due to increases in market interest rates over the yields available at the time the debt securities were purchased.
With regard to U.S. mortgage-backed securities and municipal bonds issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities.
With regard to corporate bonds, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, and (iv) internal forecasts. Securities under the U.S. Small Business Administration (“SBA”) government guaranteed loan pools program were purchased at a premium and the impairment was attributable primarily to increased prepayment speeds. The timely payment of principal and interest on these securities is guaranteed by the U.S. Government agency. The contractual terms of the subordinated notes do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Furthermore, as of March 31, 2023, there were no past due principal or interest
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
payments associated with these securities. Based upon (i) the issuer’s strong bond ratings and (ii) a zero historical loss rate, no allowance for credit losses has been recorded for available-for-sale securities at March 31, 2023. All debt securities in an unrealized loss position as of March 31, 2023 continue to perform as scheduled and the Company does not believe there is a possible credit loss or that an allowance for credit loss on these debt securities is necessary.
As of March 31, 2023 and December 31, 2022, available-for-sale securities of $72.9 million and $30.8 million, respectively, were pledged to the Federal Reserve Bank (“FRB”). The securities were pledged primarily to secure borrowings from the Federal Home Loan Bank and municipal deposits.
The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held as of March 31, 2023 and December 31, 2022. The mortgages underlying the mortgage-backed securities are not due at a single maturity date. Additionally, these mortgages often are and generally may be pre-paid without penalty, creating a degree of uncertainty that such investments can be held until maturity. For convenience, mortgage-backed securities have been included in the summary as a separate line item.

(In thousands) | Amortized Cost |  | Fair Value
| Due Within 5 years |  | Due After 5 years through 10 years |  | Due After 10 years |  | Total |  | Due Within 5 years |  | Due After 5 years through 10 years |  | Due After 10 years |  | Total
March 31, 2023: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate bonds | $ | 2,015 |  |  | $ | 15,995 |  |  | $ | — |  |  | $ | 18,010 |  |  | $ | 1,967 |  |  | $ | 11,695 |  |  | $ | — |  |  | $ | 13,662 |
Subordinated notes | 3,000 |  |  | 2,000 |  |  | — |  |  | 5,000 |  |  | 2,748 |  |  | 1,773 |  |  | — |  |  | 4,521 |
SBA loan pools | — |  |  | 1,367 |  |  | 5,120 |  |  | 6,487 |  |  | — |  |  | 1,355 |  |  | 4,150 |  |  | 5,505 |
Municipal bonds | 154 |  |  | 406 |  |  | — |  |  | 560 |  |  | 141 |  |  | 370 |  |  | — |  |  | 511 |
Available-for-sale securities with stated maturity dates | 5,169 |  |  | 19,768 |  |  | 5,120 |  |  | 30,057 |  |  | 4,856 |  |  | 15,193 |  |  | 4,150 |  |  | 24,199 |
U. S. Government agency and mortgage-backed securities | — |  |  | 5,254 |  |  | 75,830 |  |  | 81,084 |  |  | — |  |  | 4,230 |  |  | 63,307 |  |  | 67,537 |
Total available-for-sale securities | $ | 5,169 |  |  | $ | 25,022 |  |  | $ | 80,950 |  |  | $ | 111,141 |  |  | $ | 4,856 |  |  | $ | 19,423 |  |  | $ | 67,457 |  |  | $ | 91,736 |
December 31, 2022: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate bonds | $ | 3,778 |  |  | $ | 15,995 |  |  | $ | — |  |  | $ | 19,773 |  |  | $ | 3,721 |  |  | $ | 10,934 |  |  | $ | — |  |  | $ | 14,655 |
Subordinated notes | 3,000 |  |  | 2,000 |  |  | — |  |  | 5,000 |  |  | 2,830 |  |  | 1,772 |  |  | — |  |  | 4,602 |
SBA loan pools | — |  |  | 1,449 |  |  | 5,342 |  |  | 6,791 |  |  | — |  |  | 1,438 |  |  | 4,280 |  |  | 5,718 |
Municipal bonds | 154 |  |  | 407 |  |  | — |  |  | 561 |  |  | 139 |  |  | 360 |  |  | — |  |  | 499 |
Available-for-sale securities with stated maturity dates | 6,932 |  |  | 19,851 |  |  | 5,342 |  |  | 32,125 |  |  | 6,690 |  |  | 14,504 |  |  | 4,280 |  |  | 25,474 |
U. S. Government agency and mortgage-backed securities | — |  |  | 5,276 |  |  | 68,204 |  |  | 73,480 |  |  | — |  |  | 4,129 |  |  | 54,917 |  |  | 59,046 |
Total available-for-sale securities | $ | 6,932 |  |  | $ | 25,127 |  |  | $ | 73,546 |  |  | $ | 105,605 |  |  | $ | 6,690 |  |  | $ | 18,633 |  |  | $ | 59,197 |  |  | $ | 84,520 |

During the three months ended March 31, 2023, the Bank purchased $8.3 million U.S. Government agency mortgage-backed securities and sold $1.8 million available-for-sale securities and recognized a net gain on sale of $24,000. During the three months ended March 31, 2022, the Bank purchased $1.0 million corporate bonds, and did not sell any available-for-sale securities.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 4. Loans Receivable and Allowance for Credit Losses
As of March 31, 2023 and December 31, 2022, loans receivable, net, consisted of the following:

(In thousands) |  | March 31, 2023 |  | December 31, 2022
Loan portfolio segment: |  |  |  |
Commercial Real Estate |  | $ | 464,410 |  |  | $ | 437,443 |
Residential Real Estate |  | 118,892 |  |  | 124,140 |
Commercial and Industrial |  | 153,773 |  |  | 138,787 |
Consumer and Other |  | 132,410 |  |  | 141,091 |
Construction |  | 7,052 |  |  | 4,922 |
Construction to Permanent - CRE |  | 2,232 |  |  | 1,933 |
Loans receivable, gross |  | 878,769 |  |  | 848,316 |
Allowance for credit losses |  | (17,801) |  |  | (10,310) |
Loans receivable, net |  | $ | 860,968 |  |  | $ | 838,006 |

Patriot's lending activities are conducted principally in: Connecticut; the southern counties of New York including Westchester, Nassau, Suffolk, and the five Boroughs of New York City; and the Northern Counties of New Jersey, including Passaic, Bergen, Essex, Hudson and Union. 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.
During the three months ended March 31, 2023, Patriot did not purchase any commercial real estate loans. There were $20.7 million commercial real estate loans purchased during the three months ended March 31, 2022.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Residential Real Estate Loans
In 2013, Patriot discontinued offering primary mortgages on personal residences. Repayment of residential real estate loans may be negatively impacted should the borrower have financial difficulties, should there be a significant decline in the value of the property securing the loan, or should there be declines in general economic conditions.
During the three months ended March 31, 2023 and 2022, Patriot did not purchase any residential real estate loans.
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 totaled $5.8 million at March 31, 2023 and December 31, 2022. The syndicated and leveraged loans 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. Further originations in this loan class are not expected.
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 has purchased unsecured consumer loans from a third party which are higher yielding loans of 2-5 year terms that are expected to incur an increased level of charge-offs. Loans outstanding under this program at March 31, 2023 and December 31, 2022 totaled $76.2 million and $78.9 million, respectively. Loans purchased under this program totaled $9.3 million for the quarter ended March 31, 2023, and $18.4 million for the three months ended March 31, 2022.
The Company does not originate any loans 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 months ended March 31, 2023, Patriot purchased home equity line of credit loans (“HELOC”) of $1.3 million. No HELOC was purchased in the first quarter of 2022.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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. The construction loans outstanding at March 31, 2023 and December 31, 2022 totaled $7.1 million and $4.9 million, respectively.
Construction to Permanent - Commercial Real Estate
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 commercial real estate loan typically 20-25 years, resetting every five years to the Federal Home Loan Bank (“FHLB”) rate.
Close of the construction facility typically occurs when events dictate, such as receipt of a certificate of occupancy and property stabilization, which is defined as cash flow sufficient to support a predefined minimum debt coverage ratio and other conditions and covenants particular to the loan. Construction facilities are typically variable rate instruments that, upon conversion to an amortizing mortgage loan, reset to a fixed rate instrument that is the greater of the in-force variable rate plus a predetermined spread over a reference rate (e.g., prime) or a minimum interest rate.
SBA Loans
Patriot originates SBA 7(a) loans, on which the SBA has historically provided guarantees of 75% of the principal balance. However, during the pandemic in 2021, the SBA temporarily increased the guarantees to 90% and reverted to 75% on October 1, 2021. 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 $34.0 million and $32.5 million as of March 31, 2023 and December 31, 2022, respectively. During the three months ended March 31, 2023 and 2022, no SBA loans previously classified as held for sale were transferred to held for investment.
Small Business Administration Paycheck Protection Program
Under the Paycheck Protection Program of the CARES Act, small business loans were authorized 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 participated in the SBA’s Paycheck Protection Program in 2021.
Paycheck Protection Program loans totaled $158,000 and $157,000 as of March 31, 2023 and December 31, 2022, respectively, which are included in the commercial and industrial loan classifications.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Allowance for Credit Losses
As described in Note 2, “Summary of Significant Accounting Policies,” the Company adopted ASU 2016-13 on January 1, 2023, which introduced the CECL methodology for estimating all expected losses over the life of a financial asset. Under the CECL methodology, the allowance for credit losses ("ACL") is measured on a collective basis for pools of loans with similar risk characteristics. For loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis. For all loan segments collectively evaluated, losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable forecast period losses are reverted to long-term historical averages. The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses.
The Company estimates expected credit losses for pooled loans using a modeling method that incorporates probability of default (PD) and loss given default (LGD). The PD model employs a quarterly risk-rating transition method to estimate the probability of default by simulating loan downgrades and assigning increasing default probabilities to each loan. This captures the likelihood that borrowers will be unable to repay their loans according to the original terms. The LGD calculation considers characteristics such as collateral value and vintage, underlying collateral characteristics (e.g., CRE vs. residential, owner-occupied vs. investment), and other relevant underwriting characteristics.
Commercial and industrial loans include risks associated with borrower’s cash flow, debt service coverage and management’s expertise. These loans are subject to the risk that the Company may have difficulty converting collateral to a liquid asset if necessary, as well as risks associated with degree of specialization, mobility and general collectability in a default situation. These commercial loans may be subject to many different types of risks, including fraud, bankruptcy, economic downturn, deteriorated or non-existent collateral, and changes in interest rates.
Real estate construction loans include risks associated with the borrower’s credit-worthiness, contractor’s qualifications, borrower and contractor performance, and the overall risk and complexity of the proposed project. Construction lending is also subject to risks associated with sub-market dynamics, including population, employment trends and household income. During times of economic stress, this type of loan has typically had a greater degree of risk than other loan types.
Real estate mortgage loans consist of loans secured by commercial and residential real estate. Commercial real estate lending is divided into Investment CRE and Owner-Occupied CRE. Investment CRE is dependent upon successful management, marketing and expense supervision necessary to maintain the property. Repayment of these loans may be adversely affected by conditions in the real estate market or the general economy. Owner-Occupied CRE is utilized by a business for the purpose of providing the space needs for that business and the running of its operations. Repayment is dependent on the cash flow and successful operations of the business. Repayment of these loans may be adversely affected by conditions in the specific owner’s industry. Also, commercial real estate loans typically involve relatively large loan balances to a single borrower. Residential real estate lending risks are generally less significant than those of other loans. Real estate lending risks include fluctuations in the value of real estate, bankruptcies, economic downturn and customer financial problems.
Consumer loans carry a moderate degree of risk compared to other loans. They are generally more risky than traditional residential real estate loans and CRE loans, but less risky than many commercial loans and carry generally low relative balances across a diverse borrowing pool. Risk of default is usually determined by the well-being of the local economies. During times of economic stress, there is usually some level of job loss both nationally and locally, which directly affects the ability of the consumer to repay debt.
We maintain an ACL for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a drawdown on the commitment. The ACL on unfunded loan commitments is classified as a liability account on the consolidated balance sheets within other liabilities, while the corresponding provision for these credit losses is recorded as a component of provision for credit losses. The allowance for credit losses on unfunded commitments was $700,000 at March 31, 2023.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The following tables summarize the activity in the allowance for credit losses, allocated to segments of the loan portfolio, for the three months ended March 31, 2023 and loan and lease losses for three months ended March 31, 2022:

(In thousands) | Commercial Real Estate |  | Residential Real Estate |  | Commercial and Industrial |  | Consumer and Other |  | Construction |  | Construction to Permanent - CRE |  | Unallocated |  | Total |
Three Months Ended March 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for credit losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2022 | $ | 6,966 |  |  | $ | 665 |  |  | $ | 1,403 |  |  | $ | 1,207 |  |  | $ | 24 |  |  | $ | 10 |  |  | $ | 35 |  |  | $ | 10,310 |  |
Impact of ASC 326 Adoption | 1,626 |  |  | 189 |  |  | 219 |  |  | 5,347 |  |  | (4) |  |  | 29 |  |  | (35) |  |  | 7,371 |  |
Charge-offs | — |  |  | — |  |  | (2) |  |  | (1,796) |  |  | — |  |  | — |  |  | — |  |  | (1,798) |  |
Recoveries | — |  |  | — |  |  | 7 |  |  | 173 |  |  | — |  |  | — |  |  | — |  |  | 180 |  |
Provisions (credits) | 1,217 |  |  | (1) |  |  | 172 |  |  | 341 |  |  | 1 |  |  | 8 |  |  | — |  |  | 1,738 |  | (1)
March 31, 2023 | $ | 9,809 |  |  | $ | 853 |  |  | $ | 1,799 |  |  | $ | 5,272 |  |  | $ | 21 |  |  | $ | 47 |  |  | $ | — |  |  | $ | 17,801 |  |
Three Months Ended March 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan and lease losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2021 | $ | 5,063 |  |  | $ | 1,700 |  |  | $ | 2,532 |  |  | $ | 253 |  |  | $ | 78 |  |  | $ | 41 |  |  | $ | 238 |  |  | $ | 9,905 |  |
Charge-offs | — |  |  | — |  |  | (68) |  |  | (47) |  |  | (70) |  |  | — |  |  | — |  |  | (185) |  |
Recoveries | — |  |  | 1 |  |  | 15 |  |  | 1 |  |  | — |  |  | — |  |  | — |  |  | 17 |  |
Provisions (credits) | (174) |  |  | (189) |  |  | 381 |  |  | 112 |  |  | 48 |  |  | (32) |  |  | (146) |  |  | — |  |
March 31, 2022 | $ | 4,889 |  |  | $ | 1,512 |  |  | $ | 2,860 |  |  | $ | 319 |  |  | $ | 56 |  |  | $ | 9 |  |  | $ | 92 |  |  | $ | 9,737 |  |

(1) The allowance and provision for the three months ended March 31, 2023 are not comparable to prior periods due to the adoption of CECL. The provision on credit losses for three months ended March 31, 2023 does not include the credit on unfunded commitments of $402,000 for the three months ended March 31, 2023.
The following tables summarize, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for impairment as of March 31, 2023:

(In thousands) | Commercial Real Estate |  | Residential Real Estate |  | Commercial and Industrial |  | Consumer and Other |  | Construction |  | Construction to Permanent - CRE |  | Unallocated |  | Total
March 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan and lease losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 6,352 |  |  | $ | 29 |  |  | $ | 754 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 7,135 |
Collectively evaluated for impairment | 3,457 |  |  | 824 |  |  | 1,045 |  |  | 5,272 |  |  | 21 |  |  | 47 |  |  | — |  |  | 10,666 |
Total allowance for loan and lease losses | $ | 9,809 |  |  | $ | 853 |  |  | $ | 1,799 |  |  | $ | 5,272 |  |  | $ | 21 |  |  | $ | 47 |  |  | $ | — |  |  | $ | 17,801 |
Loans receivable, gross: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 11,368 |  |  | $ | 2,491 |  |  | $ | 7,559 |  |  | $ | 512 |  |  | $ | 2,317 |  |  | $ | — |  |  | $ | — |  |  | $ | 24,247 |
Collectively evaluated for impairment | 453,042 |  |  | 116,401 |  |  | 146,214 |  |  | 131,898 |  |  | 4,735 |  |  | 2,232 |  |  | — |  |  | 854,522 |
Total loans receivable, gross | $ | 464,410 |  |  | $ | 118,892 |  |  | $ | 153,773 |  |  | $ | 132,410 |  |  | $ | 7,052 |  |  | $ | 2,232 |  |  | $ | — |  |  | $ | 878,769 |

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The following tables presents the balance in the allowance for loan and lease losses and the recorded investment in loans by portfolio segment based on impairment method as of December 31, 2022:

(In thousands) | Commercial Real Estate |  | Residential Real Estate |  | Commercial and Industrial |  | Consumer and Other |  | Construction |  | Construction to Permanent - CRE |  | Unallocated |  | Total
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan and lease losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 5,430 |  |  | $ | 5 |  |  | $ | 608 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 6,043 |
Collectively evaluated for impairment | 1,536 |  |  | 660 |  |  | 795 |  |  | 1,207 |  |  | 24 |  |  | 10 |  |  | 35 |  |  | 4,267 |
Total allowance for loan losses | $ | 6,966 |  |  | $ | 665 |  |  | $ | 1,403 |  |  | $ | 1,207 |  |  | $ | 24 |  |  | $ | 10 |  |  | $ | 35 |  |  | $ | 10,310 |
Loans receivable, gross: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 11,241 |  |  | $ | 2,508 |  |  | $ | 4,653 |  |  | $ | 514 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 18,916 |
Collectively evaluated for impairment | 426,202 |  |  | 121,632 |  |  | 134,134 |  |  | 140,577 |  |  | 4,922 |  |  | 1,933 |  |  | — |  |  | 829,400 |
Total loans receivable, gross | $ | 437,443 |  |  | $ | 124,140 |  |  | $ | 138,787 |  |  | $ | 141,091 |  |  | $ | 4,922 |  |  | $ | 1,933 |  |  | $ | — |  |  | $ | 848,316 |

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, credit 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 credit 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 by the Credit Department either annually, biannually, or every 4 years, depending upon the amount of the bank’s exposure and other credit metrics.
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 semi-annual 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 semi-annual review, are required to be reported to the Audit Committee of the Board of Directors.
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 upon confirmation of the partial loss amount, but may be deferred in certain cases until the credit moves from doubtful to a partial or full loss classification. 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. If either type of
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
loan is classified as "full 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.
The following tables summarize loan amortized cost by vintage, credit quality indicator and class of loans based on year of origination:

| Term of Loans by Origination |  |  |  |
As of March 31, 2023: | 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  | Revolving |  | Total Loans Receivable Gross
Loan portfolio segment: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 32,600 |  |  | $ | 167,018 |  |  | $ | 129,918 |  |  | $ | 3,750 |  |  | $ | 30,339 |  |  | $ | 68,519 |  |  | $ | — |  |  | $ | 432,144 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | 10,933 |  |  | 4,941 |  |  | — |  |  | 15,874 |
Substandard | — |  |  | — |  |  | — |  |  | — |  |  | 10,981 |  |  | 5,411 |  |  | — |  |  | 16,392 |
| 32,600 |  |  | 167,018 |  |  | 129,918 |  |  | 3,750 |  |  | 52,253 |  |  | 78,871 |  |  | — |  |  | 464,410 |
Residential Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 191 |  |  | 1,274 |  |  | 3,533 |  |  | 12,170 |  |  | 16,084 |  |  | 82,044 |  |  | 527 |  |  | 115,823 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 617 |  |  | — |  |  | 617 |
Substandard | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,452 |  |  | — |  |  | 2,452 |
| 191 |  |  | 1,274 |  |  | 3,533 |  |  | 12,170 |  |  | 16,084 |  |  | 85,113 |  |  | 527 |  |  | 118,892 |
Commercial and Industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 633 |  |  | 16,042 |  |  | 23,495 |  |  | 8,377 |  |  | 9,288 |  |  | 5,013 |  |  | 82,113 |  |  | 144,961 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | 549 |  |  | 11 |  |  | — |  |  | 560 |
Substandard | — |  |  | 732 |  |  | 969 |  |  | 432 |  |  | 4,401 |  |  | 1,306 |  |  | 412 |  |  | 8,252 |
| 633 |  |  | 16,774 |  |  | 24,464 |  |  | 8,809 |  |  | 14,238 |  |  | 6,330 |  |  | 82,525 |  |  | 153,773 |
Consumer and Other: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 4,999 |  |  | 62,902 |  |  | 8,460 |  |  | — |  |  | 6,186 |  |  | 15,490 |  |  | 34,302 |  |  | 132,339 |
Substandard | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 71 |  |  | — |  |  | 71 |
| 4,999 |  |  | 62,902 |  |  | 8,460 |  |  | — |  |  | 6,186 |  |  | 15,561 |  |  | 34,302 |  |  | 132,410 |
Construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | — |  |  | — |  |  | 4,225 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 4,225 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | 510 |  |  | — |  |  | — |  |  | 510 |
Substandard | — |  |  | — |  |  | — |  |  | 2,317 |  |  | — |  |  | — |  |  | — |  |  | 2,317 |
| — |  |  | — |  |  | 4,225 |  |  | 2,317 |  |  | 510 |  |  | — |  |  | — |  |  | 7,052 |
Construction to Permanent -CRE: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | — |  |  | — |  |  | 2,232 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,232 |
| — |  |  | — |  |  | 2,232 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,232 |
Total | $ | 38,423 |  |  | $ | 247,968 |  |  | $ | 172,832 |  |  | $ | 27,046 |  |  | $ | 89,271 |  |  | $ | 185,875 |  |  | $ | 117,354 |  |  | $ | 878,769 |
Loans receivable, gross: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 38,423 |  |  | $ | 247,236 |  |  | $ | 171,863 |  |  | $ | 24,297 |  |  | $ | 61,897 |  |  | $ | 171,066 |  | $ | — |  | $ | 116,942 |  |  | $ | 831,724 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | 11,992 |  |  | 5,569 |  | — |  | — |  |  | 17,561 |
Substandard | — |  |  | 732 |  |  | 969 |  |  | 2,749 |  |  | 15,382 |  |  | 9,240 |  | — |  | 412 |  |  | 29,484 |
Loans receivable, gross | $ | 38,423 |  |  | $ | 247,968 |  |  | $ | 172,832 |  |  | $ | 27,046 |  |  | $ | 89,271 |  |  | $ | 185,875 |  |  | $ | 117,354 |  |  | $ | 878,769 |

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Loan Portfolio Aging Analysis
The following tables summarize performing and non-performing (i.e., non-accruing) loans receivable by portfolio segment, by aging category, by delinquency status as of March 31, 2023.

(In thousands) |  | Performing (Accruing) Loans |  |  |  |
As of March 31, 2023: |  | 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 |  | $ | 4,387 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,387 |  |  | $ | 427,757 |  |  | $ | 432,144 |  |  | $ | — |  |  | $ | 432,144 |
Special mention |  | — |  |  | — |  |  | — |  |  | — |  |  | 15,874 |  |  | 15,874 |  |  | — |  |  | 15,874 |
Substandard |  | 327 |  |  | — |  |  | — |  |  | 327 |  |  | 4,698 |  |  | 5,025 |  |  | 11,367 |  |  | 16,392 |
|  | 4,714 |  |  | — |  |  | — |  |  | 4,714 |  |  | 448,329 |  |  | 453,043 |  |  | 11,367 |  |  | 464,410 |
Residential Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | 174 |  |  | — |  |  | 329 |  |  | 503 |  |  | 115,320 |  |  | 115,823 |  |  | — |  |  | 115,823 |
Special mention |  | — |  |  | — |  |  | — |  |  | — |  |  | 617 |  |  | 617 |  |  | — |  |  | 617 |
Substandard |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,452 |  |  | 2,452 |
|  | 174 |  |  | — |  |  | 329 |  |  | 503 |  |  | 115,937 |  |  | 116,440 |  |  | 2,452 |  |  | 118,892 |
Commercial and Industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | 372 |  |  | — |  |  | 1,318 |  |  | 1,690 |  |  | 143,271 |  |  | 144,961 |  |  | — |  |  | 144,961 |
Special mention |  | — |  |  | — |  |  | — |  |  | — |  |  | 560 |  |  | 560 |  |  | — |  |  | 560 |
Substandard |  | 547 |  |  | — |  |  | — |  |  | 547 |  |  | 120 |  |  | 667 |  |  | 7,585 |  |  | 8,252 |
|  | 919 |  |  | — |  |  | 1,318 |  |  | 2,237 |  |  | 143,951 |  |  | 146,188 |  |  | 7,585 |  |  | 153,773 |
Consumer and Other: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | 1,126 |  |  | 899 |  |  | 1,745 |  |  | 3,770 |  |  | 128,569 |  |  | 132,339 |  |  | — |  |  | 132,339 |
Substandard |  | — |  |  | — |  |  | — |  |  | — |  |  | 23 |  |  | 23 |  |  | 48 |  |  | 71 |
|  | 1,126 |  |  | 899 |  |  | 1,745 |  |  | 3,770 |  |  | 128,592 |  |  | 132,362 |  |  | 48 |  |  | 132,410 |
Construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | — |  |  | — |  |  | — |  |  | — |  |  | 4,225 |  |  | 4,225 |  |  | — |  |  | 4,225 |
Special mention |  | — |  |  | — |  |  | — |  |  | — |  |  | 510 |  |  | 510 |  |  | — |  |  | 510 |
Substandard |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,317 |  |  | 2,317 |
|  | — |  |  | — |  |  | — |  |  | — |  |  | 4,735 |  |  | 4,735 |  |  | 2,317 |  |  | 7,052 |
Construction to Permanent -CRE: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,232 |  |  | 2,232 |  |  | — |  |  | 2,232 |
|  | — |  |  | — |  |  | — |  |  | — |  |  | 2,232 |  |  | 2,232 |  |  | — |  |  | 2,232 |
Total |  | $ | 6,933 |  |  | $ | 899 |  |  | $ | 3,392 |  |  | $ | 11,224 |  |  | $ | 843,776 |  |  | $ | 855,000 |  |  | $ | 23,769 |  |  | $ | 878,769 |
Loans receivable, gross: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 6,059 |  |  | $ | 899 |  |  | $ | 3,392 |  |  | $ | 10,350 |  |  | $ | 821,374 |  |  | $ | 831,724 |  |  | $ | — |  |  | $ | 831,724 |
Special mention |  | — |  |  | — |  |  | — |  |  | — |  |  | 17,561 |  |  | 17,561 |  |  | — |  |  | 17,561 |
Substandard |  | 874 |  |  | — |  |  | — |  |  | 874 |  |  | 4,841 |  |  | 5,715 |  |  | 23,769 |  |  | 29,484 |
Loans receivable, gross |  | $ | 6,933 |  |  | $ | 899 |  |  | $ | 3,392 |  |  | $ | 11,224 |  |  | $ | 843,776 |  |  | $ | 855,000 |  |  | $ | 23,769 |  |  | $ | 878,769 |

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The following tables summarize performing and non-performing loans (i.e., non-accruing) receivable by portfolio segment, by aging category, by delinquency status as of December 31, 2022.

(In thousands) |  | Performing (Accruing) Loans |  |  |  |
As of December 31, 2022: |  | 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 |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 401,313 |  |  | $ | 401,313 |  |  | $ | — |  |  | $ | 401,313 |
Special mention |  | — |  |  | — |  |  | — |  |  | — |  |  | 24,559 |  |  | 24,559 |  |  | — |  |  | 24,559 |
Substandard |  | 330 |  |  | — |  |  | — |  |  | 330 |  |  | — |  |  | 330 |  |  | 11,241 |  |  | 11,571 |
|  | 330 |  |  | — |  |  | — |  |  | 330 |  |  | 425,872 |  |  | 426,202 |  |  | 11,241 |  |  | 437,443 |
Residential Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | 330 |  |  | — |  |  | — |  |  | 330 |  |  | 120,715 |  |  | 121,045 |  |  | — |  |  | 121,045 |
Special mention |  | — |  |  | — |  |  | — |  |  | — |  |  | 625 |  |  | 625 |  |  | — |  |  | 625 |
Substandard |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,470 |  |  | 2,470 |
|  | 330 |  |  | — |  |  | — |  |  | 330 |  |  | 121,340 |  |  | 121,670 |  |  | 2,470 |  |  | 124,140 |
Commercial and Industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | 2 |  |  | — |  |  | 230 |  |  | 232 |  |  | 131,092 |  |  | 131,324 |  |  | — |  |  | 131,324 |
Special mention |  | — |  |  | — |  |  | — |  |  | — |  |  | 597 |  |  | 597 |  |  | — |  |  | 597 |
Substandard |  | 1,488 |  |  | 412 |  |  | — |  |  | 1,900 |  |  | 133 |  |  | 2,033 |  |  | 4,833 |  |  | 6,866 |
|  | 1,490 |  |  | 412 |  |  | 230 |  |  | 2,132 |  |  | 131,822 |  |  | 133,954 |  |  | 4,833 |  |  | 138,787 |
Consumer and Other: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | 929 |  |  | 3,175 |  |  | 925 |  |  | 5,029 |  |  | 135,990 |  |  | 141,019 |  |  | — |  |  | 141,019 |
Substandard |  | — |  |  | — |  |  | — |  |  | — |  |  | 23 |  |  | 23 |  |  | 49 |  |  | 72 |
|  | 929 |  |  | 3,175 |  |  | 925 |  |  | 5,029 |  |  | 136,013 |  |  | 141,042 |  |  | 49 |  |  | 141,091 |
Construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | 895 |  |  | — |  |  | — |  |  | 895 |  |  | 3,503 |  |  | 4,398 |  |  | — |  |  | 4,398 |
Special mention |  | — |  |  | — |  |  | — |  |  | — |  |  | 524 |  |  | 524 |  |  | — |  |  | 524 |
|  | 895 |  |  | — |  |  | — |  |  | 895 |  |  | 4,027 |  |  | 4,922 |  |  | — |  |  | 4,922 |
Construction to Permanent - CRE: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,933 |  |  | 1,933 |  |  | — |  |  | 1,933 |
|  | — |  |  | — |  |  | — |  |  | — |  |  | 1,933 |  |  | 1,933 |  |  | — |  |  | 1,933 |
Total |  | $ | 3,974 |  |  | $ | 3,587 |  |  | $ | 1,155 |  |  | $ | 8,716 |  |  | $ | 821,007 |  |  | $ | 829,723 |  |  | $ | 18,593 |  |  | $ | 848,316 |
Loans receivable, gross: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 2,156 |  |  | $ | 3,175 |  |  | $ | 1,155 |  |  | $ | 6,486 |  |  | $ | 794,546 |  |  | $ | 801,032 |  |  | $ | — |  |  | $ | 801,032 |
Special mention |  | — |  |  | — |  |  | — |  |  | — |  |  | 26,305 |  |  | 26,305 |  |  | — |  |  | 26,305 |
Substandard |  | 1,818 |  |  | 412 |  |  | — |  |  | 2,230 |  |  | 156 |  |  | 2,386 |  |  | 18,593 |  |  | 20,979 |
Loans receivable, gross |  | $ | 3,974 |  |  | $ | 3,587 |  |  | $ | 1,155 |  |  | $ | 8,716 |  |  | $ | 821,007 |  |  | $ | 829,723 |  |  | $ | 18,593 |  |  | $ | 848,316 |

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The following tables summarize non-performing (i.e., non-accruing) loans by aging category and status, within the applicable loan portfolio segment as of March 31, 2023 and December 31, 2022:

(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 March 31, 2023: |  |  |  |  |  |  |  |  |  |  |  |
Loan portfolio segment: |  |  |  |  |  |  |  |  |  |  |  |
Commercial Real Estate: |  |  |  |  |  |  |  |  |  |  |  |
Substandard |  | $ | — |  |  | $ | — |  |  | $ | 11,367 |  |  | $ | 11,367 |  |  | $ | — |  |  | $ | 11,367 |
Residential Real Estate: |  |  |  |  |  |  |  |  |  |  |  |
Substandard |  | 641 |  |  | — |  |  | 1,795 |  |  | 2,436 |  |  | 16 |  |  | 2,452 |
Commercial and Industrial: |  |  |  |  |  |  |  |  |  |  |  |
Substandard |  | — |  |  | 914 |  |  | 5,521 |  |  | 6,435 |  |  | 1,150 |  |  | 7,585 |
Consumer and Other: |  |  |  |  |  |  |  |  |  |  |  |
Substandard |  | — |  |  | — |  |  | 27 |  |  | 27 |  |  | 21 |  |  | 48 |
Construction: |  |  |  |  |  |  |  |  |  |  |  |
Substandard |  | 2,317 |  |  | — |  |  | — |  |  | 2,317 |  |  | — |  |  | 2,317 |
Total non-accruing loans |  | $ | 2,958 |  |  | $ | 914 |  |  | $ | 18,710 |  |  | $ | 22,582 |  |  | $ | 1,187 |  |  | $ | 23,769 |
As of December 31, 2022: |  |  |  |  |  |  |  |  |  |  |  |
Loan portfolio segment: |  |  |  |  |  |  |  |  |  |  |  |
Commercial Real Estate: |  |  |  |  |  |  |  |  |  |  |  |
Substandard |  | $ | — |  |  | $ | — |  |  | $ | 11,241 |  |  | $ | 11,241 |  |  | $ | — |  |  | $ | 11,241 |
Residential Real Estate: |  |  |  |  |  |  |  |  |  |  |  |
Substandard |  | 657 |  |  | — |  |  | 1,796 |  |  | 2,453 |  |  | 17 |  |  | 2,470 |
Commercial and Industrial: |  |  |  |  |  |  |  |  |  |  |  |
Substandard |  | 46 |  |  | 395 |  |  | 3,196 |  |  | 3,637 |  |  | 1,196 |  |  | 4,833 |
Consumer and Other: |  |  |  |  |  |  |  |  |  |  |  |
Substandard |  | — |  |  | — |  |  | 27 |  |  | 27 |  |  | 22 |  |  | 49 |
Total non-accruing loans |  | $ | 703 |  |  | $ | 395 |  |  | $ | 16,260 |  |  | $ | 17,358 |  |  | $ | 1,235 |  |  | $ | 18,593 |

If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $63,000 and $115,000 would have been recognized during the three months ended March 31, 2023 and 2022.
Interest income collected and recognized on non-accruing loans for the three months ended March 31, 2023 and 2022 was $282,000 and $90,000, respectively.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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. 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.
Loan Modifications Made to Borrowers Experiencing Financial Difficulty
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. Substantially all 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. 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 loan, the loan continues accruing interest. Non-accruing modified loans 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.
During the three months ended March 31, 2023 and 2022, the Company had no modified loans made to borrowers experiencing financial difficulty. There were no modified loans that had a payment default during the three months ended March 31, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty. At March 31, 2023 and December 31, 2022, there were no commitments to advance additional funds under the modified loans.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Individually Evaluated Loans
The following table reflects information about the individually evaluated loans by class as of March 31, 2023 and December 31, 2022:

(In thousands) |  | March 31, 2023 |  | December 31, 2022
|  | Recorded Investment |  | Principal Outstanding |  | Related Allowance |  | Recorded Investment |  | Principal Outstanding |  | Related Allowance
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Commercial Real Estate |  | $ | 387 |  |  | $ | 430 |  |  | $ | — |  |  | $ | 2,435 |  |  | $ | 2,428 |  |  | $ | — |
Residential Real Estate |  | 763 |  |  | 882 |  |  | — |  |  | 2,402 |  |  | 2,224 |  |  | — |
Commercial and Industrial |  | 2,524 |  |  | 4,801 |  |  | — |  |  | 1,939 |  |  | 2,424 |  |  | — |
Consumer and Other |  | 512 |  |  | 512 |  |  | — |  |  | 514 |  |  | 514 |  |  | — |
Construction |  | 2,317 |  |  | 2,317 |  |  | — |  |  | — |  |  | — |  |  | — |
|  | 6,503 |  |  | 8,942 |  |  | — |  |  | 7,290 |  |  | 7,590 |  |  | — |
With a related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Commercial Real Estate |  | $ | 10,981 |  |  | $ | 10,968 |  |  | $ | 6,352 |  |  | 8,806 |  |  | 8,656 |  |  | 5,430 |
Residential Real Estate |  | 1,728 |  |  | 1,553 |  |  | 29 |  |  | 106 |  |  | 105 |  |  | 5 |
Commercial and Industrial |  | 5,035 |  |  | 5,241 |  |  | 754 |  |  | 2,714 |  |  | 2,863 |  |  | 608 |
Consumer and Other |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
|  | 17,744 |  |  | 17,762 |  |  | 7,135 |  |  | 11,626 |  |  | 11,624 |  |  | 6,043 |
Individually evaluated loans, Total: |  |  |  |  |  |  |  |  |  |  |  |
Commercial Real Estate |  | 11,368 |  |  | 11,398 |  |  | 6,352 |  |  | 11,241 |  |  | 11,084 |  |  | 5,430 |
Residential Real Estate |  | 2,491 |  |  | 2,435 |  |  | 29 |  |  | 2,508 |  |  | 2,329 |  |  | 5 |
Commercial and Industrial |  | 7,559 |  |  | 10,042 |  |  | 754 |  |  | 4,653 |  |  | 5,287 |  |  | 608 |
Consumer and Other |  | 512 |  |  | 512 |  |  | — |  |  | 514 |  |  | 514 |  |  | — |
Construction |  | 2,317 |  |  | 2,317 |  |  | — |  |  | — |  |  | — |  |  | — |
Total |  | $ | 24,247 |  |  | $ | 26,704 |  |  | $ | 7,135 |  |  | $ | 18,916 |  |  | $ | 19,214 |  |  | $ | 6,043 |

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The following table summarizes additional information regarding individually evaluated loans by class for the three months ended March 31, 2023 and 2022.

(In thousands) |  | Three Months Ended March 31, 2023 |  | Three Months Ended March 31, 2022 |  |  |  |
|  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized |  |  |  |  |  |  |  |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial Real Estate |  | $ | 899 |  |  | $ | — |  |  | $ | 6,806 |  |  | $ | 32 |  |  |  |  |  |  |  |  |
Residential Real Estate |  | 1,179 |  |  | 3 |  |  | 2,840 |  |  | 8 |  |  |  |  |  |  |  |  |
Commercial and Industrial |  | 2,402 |  |  | 82 |  |  | 621 |  |  | 4 |  |  |  |  |  |  |  |  |
Consumer and Other |  | 513 |  |  | 9 |  |  | 522 |  |  | 4 |  |  |  |  |  |  |  |  |
Construction |  | 1,738 |  |  | — |  |  | — |  |  | — |  |  |  |  |  |  |  |  |
|  | 6,731 |  |  | 94 |  |  | 10,789 |  |  | 48 |  |  |  |  |  |  |  |  |
With a related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial Real Estate |  | 10,405 |  |  | 154 |  |  | 8,873 |  |  | 25 |  |  |  |  |  |  |  |  |
Residential Real Estate |  | 1,352 |  |  | 1 |  |  | 1,328 |  |  | 21 |  |  |  |  |  |  |  |  |
Commercial and Industrial |  | 4,052 |  |  | 43 |  |  | 2,738 |  |  | 2 |  |  |  |  |  |  |  |  |
Consumer and Other |  | 18 |  |  | — |  |  | 165 |  |  | 1 |  |  |  |  |  |  |  |  |
|  | 15,827 |  |  | 198 |  |  | 13,104 |  |  | 49 |  |  |  |  |  |  |  |  |
Individually evaluated loans, Total: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial Real Estate |  | 11,304 |  |  | 154 |  |  | 15,679 |  |  | 57 |  |  |  |  |  |  |  |  |
Residential Real Estate |  | 2,531 |  |  | 4 |  |  | 4,168 |  |  | 29 |  |  |  |  |  |  |  |  |
Commercial and Industrial |  | 6,454 |  |  | 125 |  |  | 3,359 |  |  | 6 |  |  |  |  |  |  |  |  |
Consumer and Other |  | 531 |  |  | 9 |  |  | 687 |  |  | 5 |  |  |  |  |  |  |  |  |
Construction |  | 1,738 |  |  | — |  |  | — |  |  | — |  |  |  |  |  |  |  |  |
Total |  | $ | 22,558 |  |  | $ | 292 |  |  | $ | 23,893 |  |  | $ | 97 |  |  |  |  |  |  |  |  |

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.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 5. Loans Held for Sale
Loans held for sale represent the guaranteed portion of SBA loans originated and are reflected at the lower of aggregate cost or market value. As of March 31, 2023, SBA loans held for sale was $6.9 million, consisting of $4.5 million SBA commercial real estate loans and $2.4 million SBA commercial and industrial loans, respectively. There were $5.2 million of SBA loans held for sale at December 31, 2022, consisting of $3.1 million SBA commercial and industrial loans and $2.1 million SBA commercial real estate loans. During the three months ended March 31, 2023 and 2022 , no SBA loans previously classified as held for sale were transferred to held for investment.
The Company generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the unguaranteed portion in its portfolio. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets, less the discount of the retained portion of the loan are recognized in income.
Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment will be evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.
Serviced loans sold to others are not included in the accompanying consolidated balance sheets. The total amount of such loans serviced, but owned by third party, amounted to approximately $47.5 million and $47.3 million at March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023 and December 31, 2022, the servicing asset has a carrying value of $893,000 and $886,000, respectively, and fair value of $987,000 and $1.0 million, respectively. Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets. The servicing asset is included in other assets on the consolidated balance sheets.
The following table presents an analysis of the activity in the SBA servicing assets for the three months ended March 31, 2023 and 2022:

(In thousands) | Three Month Ended March 31, |  |
| 2023 |  | 2022 |  |  |  |
Beginning balance | $ | 886 |  |  | $ | 584 |  |  |  |  |
Servicing rights capitalized | 34 |  |  | 52 |  |  |  |  |
Servicing rights amortized | (11) |  |  | (8) |  |  |  |  |
Servicing rights disposed | (16) |  |  | (2) |  |  |  |  |
Ending balance | $ | 893 |  |  | $ | 626 |  |  |  |  |

Note 6. Business Combination, Goodwill and Other Intangible Assets
The Company completed its acquisition of Prime Bank in May 2018, and recorded goodwill balance was $1.1 million as of March 31, 2023 and December 31, 2022.
Goodwill is evaluated for impairment annually, in the fourth quarter of the year, or whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities, and acts by governments and courts.
The Company did not perform an interim goodwill test in the first three months of 2023 as no events occurred which would trigger an impairment assessment.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 7. Deposits
The following table presents the balance of deposits held, by category as of March 31, 2023 and December 31, 2022.

(In thousands) |  | March 31, 2023 |  | December 31, 2022
Non-interest bearing |  | $ | 152,773 |  |  | $ | 269,636 |
Interest bearing: |  |  |  |
Negotiable order of withdrawal accounts |  | 29,316 |  |  | 34,440 |
Savings deposits |  | 56,418 |  |  | 71,002 |
Money market deposits |  | 306,474 |  |  | 211,000 |
Certificates of deposit, less than $250,000 |  | 162,734 |  |  | 165,793 |
Certificates of deposit, $250,000 or greater |  | 43,664 |  |  | 59,877 |
Brokered deposits |  | 105,089 |  |  | 48,698 |
Interest bearing, Total |  | 703,695 |  |  | 590,810 |
Total Deposits |  | $ | 856,468 |  |  | $ | 860,446 |

The prepaid debit card deposits are included in the non-interest-bearing deposits and money market deposits, which totaled approximately $176.2 million and $197.3 million as of March 31, 2023 and December 31, 2022, respectively.
As of March 31, 2023, contractual maturities of Certificates of Deposit (“CDs”), and brokered deposits is summarized as follows:

(In thousands) | CDs less than $250,000 |  | CDs $250,000 or greater |  | Brokered Deposits |  | Total
1 year or less | $ | 114,989 |  |  | $ | 33,040 |  |  | $ | 99,980 |  |  | $ | 248,009 |
More than 1 year through 2 years | 23,955 |  |  | 9,368 |  |  | 4,858 |  |  | 38,181 |
More than 2 years through 3 years | 9,911 |  |  | 1,256 |  |  | 251 |  |  | 11,418 |
More than 3 years through 4 years | 488 |  |  | — |  |  | — |  |  | 488 |
More than 4 years through 5 years | 13,391 |  |  | — |  |  | — |  |  | 13,391 |
| $ | 162,734 |  |  | $ | 43,664 |  |  | $ | 105,089 |  |  | $ | 311,487 |

Note 8. Derivatives
Derivatives Not Designated in Hedge Relationships
Patriot is a party to four interest rate swaps derivatives that are not designated as hedging instruments. Under a program, Patriot will execute interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Patriot executes with a third party, such that Patriot minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Patriot entered into two initial interest rate swaps under the program in November 2018, and another two swaps were entered into in May 2019. As of March 31, 2023 and December 31, 2022, Patriot did not have any cash pledged for collateral on its interest rate swaps.
The Company did not recognize any net gain or loss in other noninterest income on the consolidated statements of operations during the three months ended March 31, 2023 and 2022.
Derivatives Designated in Hedge Relationships
Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. In April 2021, Patriot entered into an interest rate swap, which was designated as a cash flow hedge that effectively converted variable-rate receivable into fixed-rate receivable. The Company’s objectives in using the cash flow hedge are to add stability to interest receivable and to manage its exposure to contractually specified interest rate movements. Under the term of the swap contract, the Company hedged the cash flows associated with a pool of 1-month LIBOR floating rate loans by converting a $50 million portion of that pool of loans into fixed rates with the swap. The Bank received fixed and paid floating rate based on 1 month LIBOR for a 7-year rolling period beginning April 29, 2021. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk. Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. In August 2021, the cash flow hedge interest rate swap contract was terminated.
The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.
Information about the valuation methods used to measure the fair value of derivatives is provided in Note 13 to the consolidated financial statements.
The following table presents summary information regarding these derivatives for the periods presented (dollars in thousands):

(In thousands) | Notional Amount |  | Maturity (Years) |  | Fixed Rate |  | Variable Rate |  | Fair Value
March 31, 2023 |  |  |  |  |  |  |  |  |
Classified in Other Assets: |  |  |  |  |  |  |  |  |
3rd party interest rate swap | $ | 4,707 |  |  | 6.25 |  | 5.25 | % |  | 1 Mo. LIBOR + 1.96% |  | $ | 32 |
3rd party interest rate swap | 1,354 |  |  | 6.26 |  | 4.38 | % |  | 1 Mo. LIBOR + 2.00% |  | 74 |
Classified in Other Liabilities: |  |  |  |  |  |  |  |  |
Customer interest rate swap | $ | 4,707 |  |  | 6.25 |  | 5.25 | % |  | 1 Mo. LIBOR + 1.96% |  | $ | (32) |
Customer interest rate swap | 1,354 |  |  | 6.26 |  | 4.38 | % |  | 1 Mo. LIBOR + 2.00% |  | (74) |
December 31, 2022 |  |  |  |  |  |  |  |  |
Classified in Other Assets: |  |  |  |  |  |  |  |  |
3rd party interest rate swap | $ | 4,736 |  |  | 6.30 |  | 5.25 | % |  | 1 Mo. LIBOR + 1.96% |  | $ | 106 |
3rd party interest rate swap | 1,363 |  |  | 6.50 |  | 4.38 | % |  | 1 Mo. LIBOR + 2.00% |  | 97 |
Classified in Other Liabilities: |  |  |  |  |  |  |  |  |
Customer interest rate swap | $ | 4,736 |  |  | 6.30 |  | 5.25 | % |  | 1 Mo. LIBOR + 1.96% |  | $ | (106) |
Customer interest rate swap | 1,363 |  |  | 6.50 |  | 4.38 | % |  | 1 Mo. LIBOR + 2.00% |  | (97) |

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 9. Share-Based Compensation and Employee Benefit Plan
In 2011, the Company adopted the Patriot National Bancorp, Inc. 2012 Stock Plan (the “2012 Plan”). The 2012 Plan was amended in 2020 and renamed as the Patriot National Bancorp, Inc. 2020 Restricted Stock Award Plan (the “2020 Plan”). A copy of the 2020 Plan was filed as Exhibit 10.1 to the Company’s Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on April 30, 2021. The 2020 Plan provides an incentive to directors and employees of the Company by the grant of restricted stock awards (“RSA”).On November 10, 2022, the Board of Directors approved the Amendment and Restatement of the 2020 Plan (the “Amended and Restated 2020 Plan”), which was approved and ratified by shareholders of the Company on December 14, 2022.
The 2020 Plan was amended primarily to (i) reduce the total number of shares authorized for issuance thereunder from 3,000,000 shares to 400,000 shares; and (ii) limit the maximum number of shares of Company’s Common Stock granted during a single fiscal year to any non-employee director, together with any cash fees paid to such director, to be no more than a total value of $300,000. As of March 31, 2023, 234,617 shares of stock were available for issuance under the Plan. In accordance with the terms of the Plan, the vesting of RSAs may be accelerated at the discretion of the Compensation Committee of the Board of Directors. The Compensation Committee sets the terms and conditions applicable to the vesting of RSAs. RSAs granted to directors and employees generally vest in quarterly or annual installments over a three, four or five year period from the date of grant.
The following is a summary of the status of the Company’s restricted shares and changes for the three months ended March 31, 2023 and 2022:

Three months ended March 31, 2023: |  | Number of Shares Awarded |  | Weighted Average Grant Date Fair Value
Unvested at December 31, 2022 |  | 22,660 |  | $ | 7.11 |
Unvested at March 31, 2023 |  | 22,660 |  | $ | 7.11 |

Three months ended March 31, 2022: |  | Number of Shares Awarded |  | Weighted Average Grant Date Fair Value
Unvested at December 31, 2021 |  | 21,468 |  | $ | 6.48 |
Unvested at March 31, 2022 |  | 21,468 |  | $ | 6.48 |

The Company recognizes compensation expense for all director and employee share-based compensation awards on a straight-line basis over the requisite service period, which is equal to the vesting schedule of each award, for each vesting portion of an award equal to its grant date fair value.
For the three months ended March 31, 2023, the Company recognized total share-based compensation expense of $23,000. The share-based compensation attributable to employees of Patriot amounted to $14,000. Included in share-based compensation expense attributable to Patriot’s external directors, were $9,000. The directors received total compensation of $55,000, which amounts are included in other operating expenses in the consolidated statements of operations.
For the three months ended March 31, 2022, the Company recognized total share-based compensation expense of $21,000. The share-based compensation attributable to employees of Patriot amounted to $8,000. Included in share-based compensation expense were $13,000 attributable to Patriot’s external directors, who received total compensation of $63,000, which amounts are included in other operating expenses in the consolidated statements of operations.
Unrecognized compensation expense attributable to the unvested restricted shares outstanding as of March 31, 2023 amounted to $213,000, which amount is expected to be recognized over the weighted average remaining life of the awards of 2.8 years.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Retirement Plan
Patriot offers employees participation in the Patriot Bank, N.A. 401(k) Savings Plan (the "401(k) Plan") under Section 401(k) of the Internal Revenue Code, along with the ROTH feature to the Plan. The 401(k) Plan covers substantially all employees who have completed one month of service, are 21 years of age and who elect to participate. Under the terms of the 401(k) Plan, participants can contribute up to the maximum amount allowed, subject to Federal limitations. At its discretion, Patriot may match eligible participating employee contributions at the rate of 50% of the first 6% of the participants’ salary contributed to the 401(k) Plan. During the three months ended March 31, 2023 and 2022, Patriot made matching contributions to the 401(k) Plan of $75,000 and $74,000, respectively.
Note 10. Earnings per share
The Company is required to present basic earnings per share and diluted earnings per share in its Consolidated Statements of Operations. Basic earnings per share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflects additional common shares that would have been outstanding if potentially dilutive common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding unvested RSAs granted to directors and employees. The dilutive effect resulting from these potential shares is determined using the treasury stock method. The Company is also required to provide a reconciliation of the numerator and denominator used in the computation of both basic and diluted earnings per share.
The following table summarizes the computation of basic and diluted earnings per share for the three months ended March 31, 2023 and 2022:

(Net income in thousands) |  | Three Months Ended March 31, |  |
|  | 2023 |  | 2022 |  |  |  |
Basis earnings per share: |  |  |  |  |  |  |  |
Net income attributable to Common shareholders |  | $ | (53) |  |  | $ | 800 |  |  |  |  |
Divided by: |  |  |  |  |  |  |  |
Weighted average shares outstanding |  | 3,965,186 |  | 3,956,492 |  |  |  |
Basic earnings per common share |  | $ | (0.01) |  |  | $ | 0.20 |  |  |  |  |
Diluted earnings per share: |  |  |  |  |  |  |  |
Net income attributable to Common shareholders |  | $ | (53) |  |  | $ | 800 |  |  |  |  |
Weighted average shares outstanding |  | 3,965,186 |  | 3,956,492 |  |  |  |
Effect of potentially dilutive restricted common shares |  | — |  | (1) | 9,510 |  |  |  |
Divided by: |  |  |  |  |  |  |  |
Weighted average diluted shares outstanding |  | 3,965,186 |  | 3,966,002 |  |  |  |
Diluted earnings per common share |  | $ | (0.01) |  |  | $ | 0.20 |  |  |  |  |

(1) |  | The weighted average diluted shares outstanding does not include 491 anti-dilutive restricted common shares for the three months ended March 31, 2023.

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 11. Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, Patriot is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contractual amounts of these instruments reflect the extent of involvement Patriot has in particular classes of financial instruments.
The contractual amount of commitments to extend credit and standby letters of credit represents the maximum amount of potential accounting loss should: the contract be fully drawn upon; the customer default; and the value of any existing collateral become worthless. Patriot applies its credit policies to entering commitments and conditional obligations and, as with its lending activates, evaluates each customer’s creditworthiness on a case-by-case basis. Management believes that it effectively mitigates the credit risk of these financial instruments through its credit approval processes, establishing credit limits, monitoring the on-going creditworthiness of recipients and grantees, and the receipt of collateral as deemed necessary.
Financial instruments with credit risk at March 31, 2023 and December 31, 2022 are as follows:

(In thousands) |  | March 31, 2023 |  | December 31, 2022
Commitments to extend credit: |  |  |  |
Unused lines of credit |  | $ | 125,357 |  |  | $ | 100,986 |
Undisbursed construction loans |  | 10,122 |  |  | 12,000 |
Home equity lines of credit |  | 14,736 |  |  | 26,878 |
Future loan commitments |  | 55,150 |  |  | 14,365 |
Financial standby letters of credit |  | — |  |  | 78 |
|  | $ | 205,365 |  |  | $ | 154,307 |

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses, and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon extending credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include commercial property, residential property, deposits and securities. Patriot has established an allowance for credit loss of $700,000 and $8,000 as of March 31, 2023 and December 31, 2022, respectively, which is included in accrued expenses and other liabilities. The increase in allowance for credit loss in 2023 is primarily due to the adoption of CECL.
Standby letters of credit are written commitments issued by Patriot to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded at fair value and included in the consolidated balance sheet.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 12. Regulatory and Operational Matters
Federal and state regulatory authorities have adopted standards requiring financial institutions to maintain increased levels of capital. Effective January 1, 2015, federal banking agencies imposed four minimum capital requirements on a community bank’s risk-based capital ratios consisting of Total Capital, Tier 1 Capital, Common Equity Tier 1 (“CET1”) Capital, and a Tier 1 Leverage Capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its on- and off-balance sheet assets and activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure, liquidity, funding and market risks, quality and level of earnings, concentrations of credit, quality of loans and investments, nontraditional activity risk, policy effectiveness, and management's overall ability to monitor and control risk.
In September 2019, the community bank leverage ratio (“CBLR”) framework was jointly issued by the Federal Deposit Insurance Corporation ("FDIC"), the Office of the Comptroller of the Currency (“OCC”) and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The CARES Act directed the federal banking agencies to issue an interim rule temporarily lowering the CBLR ratio to 8% which the agencies did with a transition back to 9% beginning January 1, 2022.
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. A community bank which meets the leverage ratio requirement and other CBLR framework requirements will not be subject to other capital and leverage requirements and will be considered “well capitalized.”
In September 2021, the Bank elected to adopt the CBLR framework. The Bank’s Tier 1 leverage ratio as of March 31, 2023 and December 31, 2022 was 9.25% and 9.27%, respectively, which satisfied the “greater than 9 percent” leverage ratio requirement under the CBLR framework. Management continuously assesses the adequacy of the Bank’s capital in order to maintain its “well capitalized” status.
The Bank’s Community Bank Leverage Ratio regulatory capital amounts and ratios at March 31, 2023 and December 31, 2022 are summarized as follows:

(In thousands) | March 31, 2023 |  | December 31, 2022 |
Patriot Bank, N.A. | Amount |  | Ratio |  | Amount |  | Ratio |
Tier 1 Leverage Capital (to average assets): |  |  |  |  |  |  |  |
Actual | $ | 98,496 |  |  | 9.25 | % |  | $ | 100,267 |  |  | 9.27 | % |
To be Well Capitalized | 95,790 |  |  | 9.00 | % | (1) | 97,388 |  |  | 9.00 | % | (1)

(1)Leverage Capital Ratio greater than 9% is considered well-capitalized under the CBLR Framework.
Designation as "Well Capitalized" does not apply to bank holding companies - the Company. Such categorization of capital adequacy only applies to insured depository institutions - the Bank.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Note 13. Fair Value and Interest Rate Risk
Patriot measures the carrying value of certain financial assets and liabilities at fair value, as required by its policies as a financial institution and by US GAAP. The carrying values of certain assets and liabilities are measured at fair value on a recurring basis, such as available-for-sale securities; while other assets and liabilities are measured at fair value on a non-recurring basis due to external factors requiring management’s judgment to estimate potential losses of value resulting in asset impairments or the establishment of valuation reserves. Measuring assets and liabilities at fair value may result in fluctuations to carrying value that have a significant impact on the results of operations or other comprehensive income for the period and period over period.
Following is a detailed summary of the guidance provided by US GAAP regarding the application of fair value measurements and Patriot’s application thereof. Additionally, the following information includes detailed summaries of the effects fair value measurements have on the carrying amounts of asset and liabilities presented in the consolidated financial statements.
The objective of fair value measurement is to value an asset that may be sold or a liability that may be transferred at the estimated value which might be obtained in a transaction between unrelated parties under current market conditions. US GAAP establishes a framework for measuring assets and liabilities at fair value, as well as certain financial instruments classified in equity. The framework provides a fair value hierarchy, which prioritizes quoted prices in active markets for identical assets and liabilities and minimizes unobservable inputs, which are inputs for which market data are not available and that are developed by management using the best information available to develop assumptions about the value market participants might place on the asset to be sold or liability to be transferred.
The three levels of the fair value hierarchy consist of:
Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date (such as active exchange-traded equity securities and certain U.S. and government agency debt securities).
Level 2 - Observable inputs other than quoted prices included in Level 1, such as:
–Quoted prices for similar assets or liabilities in active markets (such as U.S. agency and government sponsored mortgage-backed securities)
–Quoted prices for identical or similar assets or liabilities in less active markets (such as certain U.S. and government agency debt securities, and corporate and municipal debt securities that trade infrequently)
–Other inputs that are observable for substantially the full term of the asset or liability (i.e. interest rates, yield curves, prepayment speeds, default rates, etc.).
Level 3 - Valuation techniques that require unobservable inputs that are supported by little or no market activity and are significant to the fair value measurement of the asset or liability (such as pricing and discounted cash flow models that typically reflect management’s estimates of the assumptions a market participant would use in pricing the asset or liability).
A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.
Cash and due from banks and accrued interest receivable and payable
The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level 1. These financial instruments are not recorded at fair value on a recurring basis.
Available-for-sale securities
The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices, or using unobservable inputs employing various techniques and assumptions (Level 3).
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Other Investments
The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund, which is utilized by the Bank to satisfy its Community Reinvestment Act (“CRA”) lending requirements. As this fund operates as a private fund, shares in the fund are not publicly traded but may be redeemed with 60 days’ notice at cost. For that reason, the carrying amount was considered comparable to fair value at both March 31, 2023 and December 31, 2022 due to its short-term nature.
Federal Reserve Bank Stock and Federal Home Loan Bank Stock
Shares in the FRB and Federal Home Loan Bank (“FHLB”) are purchased and redeemed based upon their $100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost.
Loans
The fair value of loan portfolio is estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We estimate the fair value of our loan portfolio using an exit price notion resulting in prior periods no longer being comparable. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions depending on facts and circumstances, such as origination rates, credit risk, transaction costs, liquidity, national and regional market trends and other adjustments, utilizing publicly available rates and indices. The application of an exit price notion requires the use of significant judgment.
Loans Held for Sale
The fair value of loans held for sale is estimated by using a market approach that includes prices for loans sold awaiting settlement and other observable inputs. The Company has determined that the inputs used to value the loans held for sale fall within Level 2 of the fair value hierarchy.
SBA Servicing Asset
Servicing assets do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds. Due to the significant unobservable input related to the servicing rights, the SBA servicing asset is classified within Level 3 of the valuation hierarchy.
Derivative asset (liability) - Interest Rate Swaps
The Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of interest rate swap agreements does not contain any counterparty risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy. See Note 8 for additional disclosures on derivatives.
Deposits
The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date.
The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. Patriot does not record deposits at fair value on a recurring basis.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
Senior Notes, Subordinated Notes, and Junior Subordinated Debt and Note Payable
Patriot does not record senior notes at fair value on a recurring basis. The fair value of the senior notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.
Patriot does not record subordinated notes issued in September 2018 at fair value on a recurring basis. The fair value of the subordinated notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.
Patriot does not record junior subordinated debt at fair value on a recurring basis. Junior subordinated debt reprices quarterly, as a result, the carrying amount is considered a reasonable estimate of fair value.
The Company considers its own credit worthiness in determining the fair value of its senior notes, subordinated notes, notes payable and junior subordinated debt.
Federal Home Loan Bank Borrowings
The fair value of FHLB advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances. Patriot does not record FHLB advances at fair value on a recurring basis.
Off-balance sheet financial instruments
Off-balance sheet financial instruments are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The off-balance-sheet financial instruments (i.e., commitments to extend credit) are insignificant and are not recorded on a recurring basis.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The following table provides a comparison of the carrying amounts and estimated fair values of Patriot’s financial assets and liabilities as of March 31, 2023 and December 31, 2022:

(In thousands) |  |  | March 31, 2023 |  | December 31, 2022
| 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 |  | $ | 1,828 |  |  | $ | 1,828 |  |  | $ | 5,182 |  |  | $ | 5,182 |
Interest-bearing deposits due from banks | Level 1 |  | 58,424 |  |  | 58,424 |  |  | 33,311 |  |  | 33,311 |
Available-for-sale securities | Level 2 |  | 81,531 |  |  | 81,531 |  |  | 75,093 |  |  | 75,093 |
Available-for-sale securities | Level 3 |  | 10,205 |  |  | 10,205 |  |  | 9,427 |  |  | 9,427 |
Other investments | Level 2 |  | 4,450 |  |  | 4,450 |  |  | 4,450 |  |  | 4,450 |
Federal Reserve Bank stock | Level 2 |  | 2,673 |  |  | 2,673 |  |  | 2,627 |  |  | 2,627 |
Federal Home Loan Bank stock | Level 2 |  | 6,374 |  |  | 6,374 |  |  | 3,874 |  |  | 3,874 |
Loans receivable, net | Level 3 |  | 860,968 |  |  | 846,185 |  |  | 838,006 |  |  | 818,960 |
Loans held for sale | Level 2 |  | 6,882 |  |  | 7,471 |  |  | 5,211 |  |  | 5,534 |
SBA servicing assets | Level 3 |  | 893 |  |  | 987 |  |  | 886 |  |  | 1,013 |
Accrued interest receivable | Level 2 |  | 7,308 |  |  | 7,308 |  |  | 7,267 |  |  | 7,267 |
Interest rate swap receivable | Level 2 |  | 106 |  |  | 106 |  |  | 203 |  |  | 203 |
Financial assets, total |  |  | $ | 1,041,642 |  |  | $ | 1,027,542 |  |  | $ | 985,537 |  |  | $ | 966,941 |
Financial Liabilities: |  |  |  |  |  |  |  |  |
Demand deposits | Level 2 |  | $ | 152,773 |  |  | $ | 152,773 |  |  | $ | 269,636 |  |  | $ | 269,636 |
Savings deposits | Level 2 |  | 56,418 |  |  | 56,418 |  |  | 71,002 |  |  | 71,002 |
Money market deposits | Level 2 |  | 306,474 |  |  | 306,474 |  |  | 211,000 |  |  | 211,000 |
Negotiable order of withdrawal accounts | Level 2 |  | 29,316 |  |  | 29,316 |  |  | 34,440 |  |  | 34,440 |
Time deposits | Level 2 |  | 206,398 |  |  | 203,531 |  |  | 225,670 |  |  | 221,353 |
Brokered deposits | Level 1 |  | 105,089 |  |  | 104,362 |  |  | 48,698 |  |  | 47,684 |
FHLB borrowings | Level 2 |  | 150,000 |  |  | 149,075 |  |  | 85,000 |  |  | 83,853 |
Senior notes | Level 2 |  | 11,619 |  |  | 11,162 |  |  | 11,640 |  |  | 11,103 |
Subordinated debt | Level 2 |  | 9,847 |  |  | 9,758 |  |  | 9,840 |  |  | 9,680 |
Junior subordinated debt owed to unconsolidated trust | Level 2 |  | 8,130 |  |  | 8,130 |  |  | 8,128 |  |  | 8,128 |
Note payable | Level 3 |  | 533 |  |  | 504 |  |  | 585 |  |  | 544 |
Accrued interest payable | Level 2 |  | 771 |  |  | 771 |  |  | 585 |  |  | 585 |
Interest rate swap liability | Level 2 |  | 106 |  |  | 106 |  |  | 203 |  |  | 203 |
Financial liabilities, total |  |  | $ | 1,037,474 |  |  | $ | 1,032,380 |  |  | $ | 976,427 |  |  | $ | 969,211 |

The carrying amount of cash and noninterest bearing balances due from banks, interest-bearing deposits due from banks, and demand deposits approximates fair value, due to the short-term nature and high turnover of these balances. These amounts are included in the table above for informational purposes.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
In the normal course of its operations, Patriot assumes interest rate risk (i.e., the risk that general interest rate levels will fluctuate). As a result, the fair value of Patriot’s financial assets and liabilities are affected when interest market rates change, which change may be either favorable or unfavorable. Management attempts to mitigate interest rate risk by matching the maturities of its financial assets and liabilities. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and the maturities of its financial assets and financial liabilities, adjusting the terms of new loans and deposits in an attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk through its available funds investment strategy.
The following tables detail the financial assets measured at fair value on a recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of March 31, 2023 and December 31, 2022:

(In thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
March 31, 2023: |  |  |  |  |  |  |
U. S. Government agency and mortgage-backed securities | $ | — |  |  | $ | 67,537 |  |  | $ | — |  |  | $ | 67,537 |
Corporate bonds | — |  |  | 3,457 |  |  | 10,205 |  |  | 13,662 |
Subordinated notes | — |  |  | 4,521 |  |  | — |  |  | 4,521 |
SBA loan pools | — |  |  | 5,505 |  |  | — |  |  | 5,505 |
Municipal bonds | — |  |  | 511 |  |  | — |  |  | 511 |
Available-for-sale securities | $ | — |  |  | $ | 81,531 |  |  | $ | 10,205 |  |  | $ | 91,736 |
Interest rate swap receivable | $ | — |  |  | $ | 106 |  |  | $ | — |  |  | $ | 106 |
Interest rate swap liability | $ | — |  |  | $ | 106 |  |  | $ | — |  |  | $ | 106 |
December 31, 2022: |  |  |  |  |  |  |
U. S. Government agency and mortgage-backed securities | $ | — |  |  | $ | 59,046 |  |  | $ | — |  |  | $ | 59,046 |
Corporate bonds | — |  |  | 5,228 |  |  | 9,427 |  |  | 14,655 |
Subordinated notes | — |  |  | 4,602 |  |  | — |  |  | 4,602 |
SBA loan pools | — |  |  | 5,718 |  |  | — |  |  | 5,718 |
Municipal bonds | — |  |  | 499 |  |  | — |  |  | 499 |
Available-for-sale securities | $ | — |  |  | $ | 75,093 |  |  | $ | 9,427 |  |  | $ | 84,520 |
Interest rate swap receivable | $ | — |  |  | $ | 203 |  |  | $ | — |  |  | $ | 203 |
Interest rate swap liability | $ | — |  |  | $ | 203 |  |  | $ | — |  |  | $ | 203 |

Patriot measures certain financial assets and financial liabilities at fair value on a non-recurring basis. When circumstances dictate (e.g., impairment of long-lived assets, other than temporary impairment of collateral value), the carrying values of such financial assets and financial liabilities are adjusted to fair value or fair value less costs to sell, as may be appropriate.
As of March 31, 2023 and December 31, 2022, four corporate bonds were classified as Level 3 instruments. The fair values of these securities were determined using a present value approach. The discount rate assumed was determined based on unobservable inputs in a pricing model. During the three months ended March 31, 2023 and 2022, the Company had no transfers into or out of Levels 1, 2 or 3.
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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
The reconciliation of the beginning and ending balances during 2023 for Level 3 available-for-sale securities is as follows:

(In thousands) | Three Months Ended March 31, 2023 |  | Three Months Ended March 31, 2022
Level 3 fair value, beginning of year | $ | 9,427 |  |  | $ | 13,180 |
Purchases | — |  |  | — |
Realized gain (loss) | — |  |  | — |
Unrealized gain (loss) | 778 |  |  | (1,943) |
Transfers in and /or out of Level 3 | — |  |  | — |
Level 3 fair value, end of year | $ | 10,205 |  |  | $ | 11,237 |

The table below presents the valuation methodology and unobservable inputs for level 3 assets measured at fair value on a non-recurring basis as of March 31, 2023 and December 31, 2022:

(In thousands) | Fair Value |  | Valuation Methodology |  | Unobservable Inputs |  | Range of Inputs
March 31, 2023: |  |  |  |  |  |  |  |  |
Impaired loans, net | $ | 17,112 |  |  | Real Estate Appraisals |  | Discount for appraisal type |  | 5.8 | % | - | 20%
SBA servicing assets | 987 |  |  | Discounted Cash Flows |  | Market discount rates |  | 14.73 | % | - | 14.90%
December 31, 2022: |  |  |  |  |  |  |  |  |
Impaired loans, net | $ | 12,873 |  |  | Real Estate Appraisals |  | Discount for appraisal type |  | 5.8 | % | - | 20%
SBA servicing assets | 1,013 |  |  | Discounted Cash Flows |  | Market discount rates |  | 14.73 | % | - | 14.90%

Patriot discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not necessarily represent the complete underlying value of financial instruments included in the consolidated financial statements.
The estimated fair value amounts have been measured as of March 31, 2023 and December 31, 2022, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of the financial instruments measured may be different than if they had been subsequently valued.
The information presented should not be interpreted as an estimate of the total fair value of Patriot’s assets and liabilities, since only a portion of Patriot’s assets and liabilities are required to be measured at fair value for financial reporting purposes. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between Patriot’s fair value disclosures and those of other bank holding companies may not be meaningful.
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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
This Quarterly Report on Form 10-Q contains statements that relate to future events and expectations and, as such, constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements, other than purely historical information, including estimates, projections, statements relating to our strategies, outlook, business and financial prospects, business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements are not guarantees of future performance. Although Patriot believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, these expectations may not be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks, uncertainties and changes in circumstances, many of which are beyond Patriot’s control.
Many possible events or factors could affect Patriot’s future financial results and performance and could cause the actual results, performance or achievements of Patriot to differ materially from any anticipated results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others:
(1)changes in prevailing interest rates which would affect the interest earned on the Company’s interest earning assets and the interest paid on its interest bearing liabilities;
(2)the timing of re-pricing of the Company’s interest earning assets and interest bearing liabilities;
(3)the effect of changes in governmental monetary policy;
(4)the effect of changes in regulations applicable to the Company and the Bank and the conduct of its business;
(5)changes in competition among financial service companies, including possible further encroachment of non-banks on services traditionally provided by banks;
(6)the ability of competitors that are larger than the Company to provide products and services which it is impracticable for the Company to provide;
(7)the state of the economy and real estate values in the Company’s market areas, and the consequent effect on the quality of the Company’s loans;
(8)demand for loans and deposits in our market area;
(9)recent governmental initiatives that are expected to have a profound effect on the financial services industry and could dramatically change the competitive environment of the Company;
(10)other legislative or regulatory changes, including those related to residential mortgages, changes in accounting standards, and Federal Deposit Insurance Corporation (“FDIC”) premiums that may adversely affect the Company;
(11)the application of generally accepted accounting principles in the United States of America (“U.S. GAAP”), consistently applied;
(12)the fact that one period of reported results may not be indicative of future periods;
(13)the state of the economy in the greater New York metropolitan area and its particular effect on the Company's customers, vendors and communities and other such factors, including risk factors, as may be described in the Company’s other filings with the Securities and Exchange Commission (the “SEC”);
(14)political, social, legal and economic instability, civil unrest, war, catastrophic events, acts of terrorism;
(15)possible future outbreaks of infectious diseases, including the ongoing novel coronavirus (COVID-19) outbreak;
(16)changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
(17)our ability to access cost-effective funding;
(18)our ability to implement and change our business strategies;
(19)changes in the quality or composition of our loan or investment portfolios;
(20)technological changes that may be more difficult or expensive than expected;
(21)our ability to manage market risk, credit risk and operational risk in the current economic environment;
(22)our ability to enter new markets successfully and capitalize on growth opportunities;
(23)changes in consumer spending, borrowing and savings habits;
(24)our ability to retain key employees;
(25)our compensation expense associated with equity allocated or awarded to our employees; and
(26)the premiums paid for the guaranteed portion of SBA loans by third party investors
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The risks and uncertainties included here are not exhaustive. In addition to those included herein further information concerning our business, including additional factors that could materially affect our financial results, is included in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Further, it is not possible to assess the effect of all risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.
Critical Accounting Policies
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified the accounting for the allowance for loan and lease losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets, the impairment of goodwill, the valuation of derivatives, and the valuation of servicing assets as certain of the Company’s most critical accounting policies and estimates in that they are important to the portrayal of the Company’s financial condition and results of operations. They require management’s most subjective and complex judgment as a result of the need to make estimates about the effect of matters that are inherently uncertain. Refer to the 2022 Form 10-K for additional information.
Summary
The Company reported net loss of $53,000 ($0.01 basic and diluted loss per share) for the quarter ended March 31, 2023, compared to a net income of $800,000 ($0.20 basic and diluted earnings per share) for the quarter ended March 31, 2022.
The first quarter of 2023 financial results were adversely impacted by an elevated provision for credit losses of $1.3 million, compared to no provision for loan losses recorded for the first quarter of 2022 and the impact of lower net interest margin which was impacted by the higher funding costs resulting from the recent uncertainty in the banking sector.
The Bank reported steady quarterly loan growth of 3.6%, as compared to December 31, 2022. Net interest margin remained strong at 3.29%. The Bank continued executing its low-cost deposit gathering strategies to complement its branch franchise. This new funding silo has grown to $176.2 million as of March 31, 2023. The combination of timing events associated with the onboarding of new deposit channels and rate increases in the Bank’s steady state deposit funding has resulted in a decrease in net interest margin from the previous quarter. Net interest margin decreased 48bps from 3.77% reported in the fourth quarter of 2022, but increased 23bps from 3.06% for the first quarter of last year. The Bank’s prepaid debit card and deposit strategy programs are expected to increasingly become significant contributors to the Bank’s diversified funding sources.
During the first quarter of 2023, the Company grew both its loan book and its deposit base year-over-year, increased its net interest margin on a year-over-year basis, and increased loan loss reserves.The Bank’s strengths are evidenced by:
1) A diversified portfolio with no outsized exposures, ending the quarter split between Commercial loans, Non-Owner-Occupied CRE, and Consumer loans at 30%, 44% and 25%, respectively.
2) A highly conservative Non-Owner-Occupied CRE portfolio with a weighted average loan-to-value of 47%, and less than 9% of that portfolio attributable to office, land, or construction.
3) Minimal duration risk across all loans; 34% of the loan portfolio is tied to variable rates repricing in the next 1-3 months, and fixed rate loans have a weighted average term to rate reset of less than a year-and-a-half, so they will reprice if deposit costs continue to increase; and
4) A deposit base, supported by strong relationships, insulated from risk of flight, with 66% federally insured and 20% tied to the Bank’s prepaid vertical.
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FINANCIAL CONDITION
Total assets increased $56.7 million to $1.1 billion as of March 31, 2023, compared to $1.0 billion at December 31, 2022, primarily due to the increases in cash of $21.8 million and loans receivable of $30.5 million as of March 31, 2023.
Cash and Cash Equivalents
Cash and cash equivalents increased from $38.5 million at December 31, 2022 to $60.3 million at March 31, 2023. The increased in 2023 reflected the intention to boost balance sheet liquidity in connection with recent uncertainty in the banking sector.
The following table is a summary of the Company’s investment securities portfolio, at fair value, at the dates shown:

| March 31, |  | December 31, |  | Increase /(Decrease)
(In thousands, except per share amounts) | 2023 |  | 2022 |  | ($) |  | (%)
U. S. Government agency and mortgage-backed securities | $ | 67,537 |  |  | $ | 59,046 |  |  | $ | 8,491 |  |  | 14.38 | %
Corporate bonds | 13,662 |  |  | 14,655 |  |  | (993) |  |  | -6.78 | %
Subordinated notes | 4,521 |  |  | 4,602 |  |  | (81) |  |  | -1.76 | %
SBA loan pools | 5,505 |  |  | 5,718 |  |  | (213) |  |  | -3.73 | %
Municipal bonds | 511 |  |  | 499 |  |  | 12 |  |  | 2.40 | %
Total available-for-sale securities, at fair value | 91,736 |  |  | 84,520 |  |  | 7,216 |  |  | 8.54 | %
Other investments, at cost | 4,450 |  |  | 4,450 |  |  | — |  |  | — | %
Total investment securities | $ | 96,186 |  |  | $ | 88,970 |  |  | $ | 7,216 |  |  | 8.11 | %

Total investments increased by $7.2 million, from $89.0 million at December 31, 2022 to $96.2 million at March 31, 2023. The increase in the three months ended March 31, 2023 was primarily attributable to an increase in purchase of available-for-sale securities of $8.3 million and the net unrealized gain of $1.7 million for the available-for-sale securities, associated with rising market interest rates. During the three months ended March 31, 2023, the Bank sold available-for-sale securities of $1.8 million and recognized a net gain of $24,000.
Loans held for investment
The following table provides the composition of the Company’s loan held for investment portfolio as of March 31, 2023, and December 31, 2022:

(In thousands) | March 31, 2023 |  | December 31, 2022
| Amount |  | % |  | Amount |  | %
Loan portfolio segment: |  |  |  |  |  |  |
Commercial Real Estate | $ | 464,410 |  |  | 52.85 | % |  | $ | 437,443 |  |  | 51.57 | %
Residential Real Estate | 118,892 |  |  | 13.53 | % |  | 124,140 |  |  | 14.63 | %
Commercial and Industrial | 153,773 |  |  | 17.50 | % |  | 138,787 |  |  | 16.36 | %
Consumer and Other | 132,410 |  |  | 15.07 | % |  | 141,091 |  |  | 16.63 | %
Construction | 7,052 |  |  | 0.80 | % |  | 4,922 |  |  | 0.58 | %
Construction to permanent - CRE | 2,232 |  |  | 0.25 | % |  | 1,933 |  |  | 0.23 | %
Loans receivable, gross | 878,769 |  |  | 100.00 | % |  | 848,316 |  |  | 100.00 | %
Allowance for credit losses | (17,801) |  |  |  |  | (10,310) |  |  |
Loans receivable, net | $ | 860,968 |  |  |  |  | $ | 838,006 |  |  |

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The Company’s loan portfolio increased $30.5 million, from $848.3 million at December 31, 2022 to $878.8 million at March 31, 2023. The increase in loans was attributable to $48.5 million of new loan origination and $10.6 million in purchases of loans receivable which was partially offset by $26.3 million pay-down of the loans.
SBA loans held for investment were included in the commercial real estate loans and commercial and industrial loan classifications above. As of March 31, 2023 and December 31, 2022, SBA loans included in the commercial and industrial loan were $21.8 million and $20.3 million, respectively. SBA loans included in the commercial real estate loans were $12.2 million and $12.2 million, respectively.
At March 31, 2023, the net loan to deposit ratio was 100.5% and the net loan to total assets ratio was 78.3%. At December 31, 2022, these ratios were 100.1% and 80.3%, respectively.
Allowance for Credit Losses
The Company adopted ASU 2016-13 on December 31, 2020, and has applied it retroactively to January 1, 2023. ASU 2016-13 requires the measurement of expected credit losses for financial assets, including loans and certain off-balance-sheet credit exposures, measured at amortized cost. See Note 2 - Summary of Significant Accounting Policies to the Company's financial statements for a description of the adoption of ASU 2016-13 and the Company's allowance methodology.
The allowance for credit losses on loans was $17.8 million as of March 31, 2023, compared to allowance for loans and lease losses of $10.3 million as of December 31, 2022. The increase in allowance was mainly due to the adoption of CECL methodology and the Company recorded a transition adjustment of $7.4 million effective January1, 2023. Based upon the overall assessment and evaluation of the loan portfolio at March 31, 2023, management believes $17.8 million in the allowance for credit losses, which represented 2.03% of gross loans outstanding, is adequate under prevailing economic conditions to absorb existing losses in the loan portfolio, and a provision for loan losses of $1.7 million was recorded for the three months ended March 31, 2023.
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The following table provides detail of activity in the allowance for credit losses. During the three months ended March 31, 2023, the Company used the CECL methodology while the incurred loss methodology was used in prior years:

| Three Months Ended March 31, |  |  |
(In thousands) | March 31, 2023 |  | March 31, 2022 |  |  |  |  |
Balance at beginning of the period | $ | 10,310 |  |  | $ | 9,905 |  |  |  |  |  |
Charge-offs: |  |  |  |  |  |  |  |
Commercial and Industrial | (2) |  |  | (68) |  |  |  |  |  |
Consumer and Other | (1,796) |  |  | (47) |  |  |  |  |  |
Construction | — |  |  | (70) |  |  |  |  |  |
Total charge-offs | (1,798) |  |  | (185) |  |  |  |  |  |
Recoveries: |  |  |  |  |  |  |  |
Residential Real Estate | — |  |  | 1 |  |  |  |  |  |
Commercial and Industrial | 7 |  |  | 15 |  |  |  |  |  |
Consumer and Other | 173 |  |  | 1 |  |  |  |  |  |
Total recoveries | 180 |  |  | 17 |  |  |  |  |  |
Net charge-offs | (1,618) |  |  | (168) |  |  |  |  |  |
Impact of CECL adoption | 7,371 |  |  | — |  |  |  |  |  |
Provision for credit losses | 1,738 |  |  | — |  |  |  |  |  |
Balance at end of the period | $ | 17,801 |  |  | $ | 9,737 |  |  |  |  |  |
Ratios: |  |  |  |  |  |  |  |
Net charge-offs to average loans | 0.19 | % |  | 0.02 | % |  |  |  |  |
Allowance for credit losses to total loans | 2.03 | % |  | 1.26 | % |  |  |  |  |

The following table provides an allocation of allowance for credit losses by portfolio segment:

(In thousands) | March 31, 2023 |  | December 31, 2022
| Allowance for credit losses |  | Percent of loans in each category to total loans |  | Allowance for loan losses |  | Percent of loans in each category to total loans
Commercial Real Estate | $ | 9,809 |  |  | 52.85 | % |  | $ | 6,966 |  |  | 51.57 | %
Residential Real Estate | 853 |  |  | 13.53 | % |  | 665 |  |  | 14.63 | %
Commercial and Industrial | 1,799 |  |  | 17.50 | % |  | 1,403 |  |  | 16.36 | %
Consumer and Other | 5,272 |  |  | 15.07 | % |  | 1,207 |  |  | 16.63 | %
Construction | 21 |  |  | 0.80 | % |  | 24 |  |  | 0.58 | %
Construction to permanent - CRE | 47 |  |  | 0.25 | % |  | 10 |  |  | 0.23 | %
Unallocated | — |  |  | N/A |  | 35 |  |  | N/A
Total Allowance for credit losses | $ | 17,801 |  |  | 100.00 | % |  | $ | 10,310 |  |  | 100.00 | %

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Non-performing Assets
The following table presents non-performing assets as of March 31, 2023 and December 31, 2022:

(In thousands) | March 31, 2023 |  | December 31, 2022
Non-accruing loans: |  |  |
Commercial Real Estate | $ | 11,367 |  |  | $ | 11,241 |
Residential Real Estate | 2,452 |  |  | 2,470 |
Commercial and Industrial | 7,585 |  |  | 4,833 |
Consumer and Other | 48 |  |  | 49 |
Construction | 2,317 |  |  | — |
Total non-accruing loans | 23,769 |  |  | 18,593 |
Loans past due over 90 days and still accruing | 3,392 |  |  | 1,155 |
Total nonperforming assets | $ | 27,161 |  |  | $ | 19,748 |
Nonperforming assets to total assets | 2.47 | % |  | 1.89 | %
Nonperforming loans to total loans, net | 3.15 | % |  | 2.36 | %

As of March 31, 2023, the $23.8 million of non-accrual loans was comprised of 33 borrowers, for which a specific reserve of $7.1 million was established. For collateral dependent loans, the Bank has obtained appraisal reports from independent licensed appraisal firms and discounted those values based on the Bank’s experience selling OREO properties and for estimated selling costs to determine estimated impairment. For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate.
Loans held for sale
SBA loans held for sale totaled $6.9 million and $5.2 million as of March 31, 2023 and December 31, 2022, respectively. SBA loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value. SBA loans held for sale at March 31, 2023, consisted of $4.5 million SBA commercial real estate and $2.4 million SBA commercial and industrial loans, respectively. SBA loans held for sale at December 31, 2022, consisted of $3.1 million SBA commercial and industrial loans and $2.1 million SBA commercial real estate, respectively.
Goodwill
The Company completed its acquisition of Prime Bank in May 2018 and recorded $1.1 million of goodwill after adjustments as of May 10, 2019. No further adjustment to the goodwill was made as of March 31, 2023.
The Company did not perform an interim goodwill test for the three months ended March 31, 2023 as no events occurred which would trigger an impairment assessment.
Deferred Taxes
Deferred tax assets were $17.4 million and $15.5 million at March 31, 2023 and December 31, 2022, respectively. Deferred tax assets consist predominately of state net operating losses, capitalized costs and allowances for loan losses.
The effective tax benefit rate for the three months ended March 31, 2023 was 26.39%, compared to the effective tax provision rate of 27.99% for the three months ended March 31, 2022. The Company’s effective rates for both periods was affected by states taxes and non-deductible expenses.
Patriot anticipates utilizing the state net operating loss carry forwards to reduce income taxes otherwise payable on current and future years taxable income.
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Patriot evaluates its ability to realize its net deferred tax assets on a quarterly basis. In doing so, management considers all available evidence, both positive and negative, to determine whether it is more likely than not that the deferred tax assets will be realized. In addition, management assesses tax attributes including available tax planning strategies and state net operating loss carry-forwards that do not begin to expire until the year of 2030. No valuation allowance was recorded as of March 31, 2023 and December 31, 2022. The Company will continue to evaluate its ability to realize its net deferred tax assets. If future evidence suggests that it is more likely than not that additional deferred tax assets will not be realized, the valuation allowance will be adjusted.
Deposits
The following table is a summary of the Company’s deposits at the dates shown:

(In thousands) | March 31, |  | December 31, |  | Increase/(Decrease)
| 2023 |  | 2022 |  | $ |  | %
Non-interest bearing: |  |  |  |  |  |  |
Non-interest bearing | $ | 124,388 |  |  | $ | 118,541 |  |  | $ | 5,847 |  |  | 4.93 | %
Prepaid DDA | 28,385 |  |  | 151,095 |  |  | (122,710) |  |  | -81.21 | %
Total non-interest bearing | 152,773 |  |  | 269,636 |  |  | (116,863) |  |  | -43.34 | %
Interest bearing: |  |  |  |  |  |  |
Negotiable order of withdrawal accounts | 29,316 |  |  | 34,440 |  |  | (5,124) |  |  | -14.88 | %
Savings | 56,418 |  |  | 71,002 |  |  | (14,584) |  |  | -20.54 | %
Money market | 158,641 |  |  | 164,827 |  |  | (6,186) |  |  | -3.75 | %
Money market - prepaid deposits | 147,833 |  |  | 46,173 |  |  | 101,660 |  |  | 220.17 | %
Certificates of deposit, less than $250,000 | 162,734 |  |  | 165,793 |  |  | (3,059) |  |  | -1.85 | %
Certificates of deposit, $250,000 or greater | 43,664 |  |  | 59,877 |  |  | (16,213) |  |  | -27.08 | %
Brokered deposits | 105,089 |  |  | 48,698 |  |  | 56,391 |  |  | 115.80 | %
Total Interest bearing | 703,695 |  |  | 590,810 |  |  | 112,885 |  |  | 19.11 | %
Total Deposits | $ | 856,468 |  |  | $ | 860,446 |  |  | $ | (3,978) |  |  | -0.46 | %
Total Prepaid deposits | $ | 176,218 |  |  | $ | 197,268 |  |  | $ | (21,050) |  |  | -10.67 | %
Total deposits excluding Prepaid deposits | $ | 680,250 |  |  | $ | 663,178 |  |  | $ | 17,072 |  |  | 2.57 | %
Total uninsured deposits | $ | 293,680 |  |  | $ | 343,980 |  |  | $ | (50,299) |  |  | -14.62 | %
Uninsured deposits to total deposits | 34.29 | % |  | 39.98 | % |  |  |  |
Uninsured deposits to total deposits excluding prepaid deposits | 17.57 | % |  | 22.35 | % |  |  |  |

The Bank has expanded its deposit and funding mix over the past year, while reducing its aggregate cost of funds.
Borrowings
Total borrowings were $180.1 million and $115.2 million as of March 31, 2023 and December 31, 2022, respectively. Borrowings consist primarily of FHLB advances, senior notes, subordinated notes, junior subordinated debentures and a note payable. The senior notes, subordinated notes and junior subordinated debentures contain affirmative covenants that require the Company to maintain its and its subsidiaries’ legal entity and tax status, pay its income tax obligations on a timely basis, and comply with SEC and FDIC reporting requirements.
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Federal Home Loan Bank borrowings
The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). Borrowings from the FHLB-B are limited to a percentage of the value of qualified collateral, as defined on the FHLB-B Statement of Products Policy. Qualified collateral, as defined, primarily consists of mortgage-backed securities and loans receivable that are required to be free and clear of liens and encumbrances, and may not be pledged for any other purposes.
FHLB-B advances are structured to facilitate the Bank’s management of its balance sheet and liquidity requirements. Outstanding advances from the FHLB-B increased from $85.0 million at December 31, 2022 to $150.0 million at March 31, 2023.
At March 31, 2023, the FHLB-B advances bore fixed rates of interest ranging from 2.40% to 4.95% with maturities ranging from 3 days to 1.47 years, and have a weighted average interest rate of 4.45%.
At March 31, 2023, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $290.6 million. Remaining unused borrowing capacity under this line totaled $38.1 million at March 31, 2023.
In addition, Patriot has a $2.0 million revolving line of credit with the FHLB-B. For the three months ended March 31, 2023 and 2021, no funds had been borrowed under the line of credit.
Interest expense incurred for the three months ended March 31, 2023 and 2022 were $1.4 million and $737,000, respectively.
Correspondent Bank - Line of Credit
Patriot has entered into unsecured federal funds sweep and federal funds line of credit facility agreements with certain correspondent banks. Borrowings available under the agreements totaled $24.5 million at both March 31, 2023 and December 31, 2022. The purpose of the agreements is to provide a credit facility intended to satisfy overnight federal account balance requirements and to provide for daily settlement of FRB, Automated Clearing House (ACH), and other clearinghouse transactions.
There was no outstanding balance under the agreements at March 31, 2023 and December 31, 2022. Interest expense incurred for the three months ended March 31, 2023 was $63,000 and none for three months ended March 31, 2022 .
Other Borrowing
Patriot has pledged eligible loans as collateral to support borrowing capacity at the Federal Reserve Bank of New York’s (“FRBNY”). As of March 31, 2023, the book value of the pledged loans totaled $17.6 million with a collateral value of $12.4 million. There was no outstanding balance under the FRBNY Borrower-in-Custody program at March 31, 2023.
Senior notes
On December 22, 2016, the Company issued $12 million of senior notes ("2016 Senior Notes") bearing interest at 7% per annum. On November 17, 2021, the original maturity date of the Senior Notes was extended from December 22, 2021 to June 30, 2022.
On June 22, 2022, the Company amended and restated the 2016 Senior Notes. The maturity date of the Senior Notes was further extended to December 31, 2022, and the interest rate increases from (i) 7% to 7.25% from July 1, 2022 until September 30, 2022 and (ii) from 7.25% to 7.50% thereafter. The Senior Notes can be repaid at any time without penalty.
On December 21, 2022, the Company completed an issuance and sale of $12 million in aggregate principal amount of 8.50% fixed rate Senior Notes due January 15, 2026 (“2022 Senior Notes”). In connection with the issuance of the Senior Notes, the Company incurred $381,000 of costs, which are being amortized over the term of the 2022 Senior Notes to recognize a constant rate of interest expense. The unamortized debt issuance cost of was deducted from the face amount of the Senior Notes included in the consolidated balance sheet.
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The 2022 Senior Note Purchase Agreement contains certain customary representations, warranties, and covenants made by each of the Company and the Purchasers. The 2022 Senior Notes are not subject to any sinking fund and are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The 2022 Senior Notes are not subject to redemption at the option of the holders. Principal and interest on the 2022 Senior Notes are subject to acceleration only in limited circumstances. The 2022 Senior Notes are an unsecured, unsubordinated obligation and ranks equally in right of payment to all of the Company’s existing and future unsecured indebtedness, liabilities and other obligations that are not subordinated in right of payment to the Senior Note, and will be effectively subordinated to any of the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness. The 2022 Senior Notes are the obligations of the Company only and are not obligations of, and are not guaranteed by, any of the Company’s affiliates. At March 31, 2023 and December 31, 2022, $381,000 and $360,000 of unamortized debt issuance costs were deducted from the face amount of the Subordinated Notes included in the consolidated balance sheet, respectively.
For the three months ended March 31, 2023 and 2022, the Company recognized interest expense of $290,000 and $210,000, respectively.
Subordinated notes
On June 29, 2018, the Company entered into certain subordinated note purchase agreements with two institutional accredited investors and completed a private placement of $10 million of fixed-to-floating rate subordinated notes with the maturity date of September 30, 2028 (the “Subordinated Notes”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder.
The Subordinated Notes initially bears interest at 6.25% per annum, from and including June 29, 2018, to but excluding, June 30, 2023, payable semi-annually in arrears. From and including June 30, 2023, until but excluding June 30, 2028 or an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR (but not less than zero) plus 332.5 basis points, payable quarterly in arrears. The Company may, at its option, beginning on June 30, 2023 and on any scheduled interest payment date thereafter, redeem the Subordinated Notes.
In connection with the issuance of the Subordinated Notes, the Company incurred $291,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense. At March 31, 2023 and December 31, 2022, $153,000 and $160,000 of unamortized debt issuance costs were deducted from the face amount of the Subordinated Notes included in the consolidated balance sheet, respectively.
For the three months ended March 31, 2023 and 2022, the Company recognized interest expense of $163,000 for both periods.
Junior subordinated debt owed to unconsolidated trust
In 2003, the Patriot National Statutory Trust I (“the Trust”), which has no independent assets and is wholly-owned by the Company, issued $8.0 million of trust preferred securities. The proceeds, net of a $240,000 placement fee, were invested in junior subordinated debentures issued by the Company, which invested the proceeds in the Bank. The Bank used the proceeds to fund its operations.
Trust preferred securities currently qualify for up to 25% of the Company’s Tier I Capital, with the excess qualifying as Tier 2 Capital.
The junior subordinated debentures are unsecured obligations of the Company. The debentures are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. In addition to its obligations under the junior subordinated debentures and in conjunction with the Trust, the Company issued an unconditional guarantee of the trust preferred securities.
The junior subordinated debentures bear interest at three-month LIBOR plus 3.15% and mature on March 26, 2033, at which time the principal amount borrowed will be due. The placement fee of $240,000 is amortized and included as a component of the periodic interest expense on the junior subordinated debentures, in order to produce a constant rate of interest expense. As of March 31, 2023 and December 31, 2022, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $118,000 and $120,000, respectively, and accrued interest on the junior subordinated debentures was $11,000 and $9,000, respectively.
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For the three months ended March 31, 2023 and 2022, the Company recognized interest expense of $163,000 and $71,000, respectively.
At its option, exercisable on a quarterly basis, the Company may redeem the junior subordinated debentures from the Trust, which would then redeem the trust preferred securities.
Note Payable
In September 2015, the Bank purchased the property in which its Fairfield, Connecticut branch is located for approximately $2.0 million, a property it had been leasing until that date. The purchase price was primarily satisfied by issuing the seller a $2.0 million, nine-year, promissory note bearing interest at a fixed rate of 1.75% per annum. As of March 31, 2023 and December 31, 2022, the note had a balance outstanding of $533,000 and $585,000, respectively. The note matures in August 2024 and requires a balloon payment of approximately $234,000 at that time. The note is secured by a first Mortgage Deed and Security Agreement on the purchased property.
For the three months ended March 31, 2023 and 2022, the Company recognized interest expense of $2,000 and $4,000, respectively.
Derivatives
As of September 30, 2022, Patriot had entered into four interest rate swaps (“swaps”). Two swaps are with a loan customer to provide a facility to mitigate the fluctuations in the variable rate on the respective loan. The other two swaps are with an outside third party. The customer interest rate swaps are matched in offsetting terms to the third party interest rate swaps. The swaps are reported at fair value in other assets or other liabilities on the consolidated balance sheets. Patriot’s swaps are derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income. The Company recognized no gain on the swaps for the three months ended March 31, 2023 and 2022.
In April 2021, Patriot entered into a receive fixed/pay variable interest rate swap, which was designated as a cash flow hedge. The cash flow hedge interest rate swap contract was terminated in August 2021. No interest income was recognized during the three months ended March 31, 2023 and 2022.
Further discussion of the fair value of derivatives is set forth in Note 8 to the consolidated financial statements.
Equity
Equity decreased $5.0 million, from $59.6 million at December 31, 2022 to $54.6 million at March 31, 2023, primarily due to a cumulative adjustment to the opening balance of accumulated deficit of $6.2 million upon adoption of CECL effective January 1, 2023, which was partially offset by a net unrealized holding gain for investment portfolio of $1.2 million.
Off-Balance Sheet Commitments
The Company’s off-balance sheet commitments, which primarily consist of commitments to lend, increased $51.1 million from $154.3 million at December 31, 2022 to $205.4 million at March 31, 2023.
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Average Balances
The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the three months ended March 31, 2023 and 2022:

(In thousands) | Three Months Ended March 31,
| March 31, 2023 |  | March 31, 2022
| Average Balance |  | Interest |  | Yield |  | Average Balance |  | Interest |  | Yield
ASSETS |  |  |  |  |  |  |  |  |  |  |
Interest Earning Assets: |  |  |  |  |  |  |  |  |  |  |
Loans | $ | 860,291 |  |  | $ | 12,550 |  |  | 5.92 | % |  | $ | 748,256 |  |  | $ | 7,664 |  |  | 4.15 | %
Investments | 99,699 |  |  | 815 |  |  | 3.27 | % |  | 103,325 |  |  | 635 |  |  | 2.46 | %
Cash equivalents and other | 27,613 |  |  | 281 |  |  | 4.13 | % |  | 39,728 |  |  | 21 |  |  | 0.21 | %
Total interest earning assets | 987,603 |  |  | 13,646 |  |  | 5.60 | % |  | 891,309 |  |  | 8,320 |  |  | 3.79 | %
Cash and due from banks | 5,381 |  |  |  |  |  |  | 12,940 |  |  |  |  |
Allowance for loan losses | (17,033) |  |  |  |  |  |  | (9,883) |  |  |  |  |
Other assets | 68,553 |  |  |  |  |  |  | 63,854 |  |  |  |  |
Total Assets | $ | 1,044,504 |  |  |  |  |  |  | $ | 958,220 |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Interest bearing liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits | $ | 624,427 |  |  | $ | 3,579 |  |  | 2.32 | % |  | $ | 528,892 |  |  | $ | 409 |  |  | 0.31 | %
Borrowings | 130,667 |  |  | 1,373 |  |  | 4.26 | % |  | 95,234 |  |  | 737 |  |  | 3.14 | %
Senior notes | 11,620 |  |  | 290 |  |  | 9.98 | % |  | 12,000 |  |  | 210 |  |  | 7.00 | %
Subordinated debt | 17,971 |  |  | 326 |  |  | 7.36 | % |  | 17,933 |  |  | 234 |  |  | 5.29 | %
Note Payable and other | 1,738 |  |  | 65 |  |  | 15.17 | % |  | 757 |  |  | 4 |  |  | 2.14 | %
Total interest bearing liabilities | 786,423 |  |  | 5,633 |  |  | 2.90 | % |  | 654,816 |  |  | 1,594 |  |  | 0.99 | %
Demand deposits | 191,012 |  |  |  |  |  |  | 227,074 |  |  |  |  |
Other liabilities | 11,961 |  |  |  |  |  |  | 9,905 |  |  |  |  |
Total Liabilities | 989,396 |  |  |  |  |  |  | 891,795 |  |  |  |  |
Shareholders' equity | 55,108 |  |  |  |  |  |  | 66,425 |  |  |  |  |
Total Liabilities and Shareholders' Equity | $ | 1,044,504 |  |  |  |  |  |  | $ | 958,220 |  |  |  |  |
Net interest income |  |  | $ | 8,013 |  |  |  |  |  |  | $ | 6,726 |  |  |
Interest margin |  |  |  |  | 3.29 | % |  |  |  |  |  | 3.06 | %
Interest spread |  |  |  |  | 2.70 | % |  |  |  |  |  | 2.80 | %

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The following table presents the change in interest-earning assets and interest-bearing liabilities by major category and the related change in the interest income earned and interest expense incurred thereon attributable to the change in transactional volume in the financial instruments and the rates of interest applicable thereto, comparing the three months ended March 31, 2023 and 2022.

| Three Months Ended March 31, |  |
| 2023 compared to 2022 |  |
(In thousands) | Increase/(Decrease) |  |
| Volume |  | Rate |  | Total |  |  |  |  |  |
Interest Earning Assets: |  |  |  |  |  |  |  |  |  |  |
Loans | $ | 1,042 |  |  | $ | 3,844 |  |  | $ | 4,886 |  |  |  |  |  |  |
Investments | (18) |  |  | 198 |  |  | 180 |  |  |  |  |  |  |
Cash equivalents and other | (7) |  |  | 267 |  |  | 260 |  |  |  |  |  |  |
Total interest earning assets | 1,017 |  |  | 4,309 |  |  | 5,326 |  |  |  |  |  |  |
Interest bearing liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposit | 165 |  |  | 3,005 |  |  | 3,170 |  |  |  |  |  |  |
Borrowings | 274 |  |  | 362 |  |  | 636 |  |  |  |  |  |  |
Senior notes | (6) |  |  | 86 |  |  | 80 |  |  |  |  |  |  |
Subordinated debt | 1 |  |  | 91 |  |  | 92 |  |  |  |  |  |  |
Note payable and other | 61 |  |  | — |  |  | 61 |  |  |  |  |  |  |
Total interest bearing liabilities | 495 |  |  | 3,544 |  |  | 4,039 |  |  |  |  |  |  |
Net interest income | $ | 522 |  |  | $ | 765 |  |  | $ | 1,287 |  |  |  |  |  |  |

Results of Operations
For the three months ended March 31, 2023, interest income and dividend income was $13.6 million, which increased $5.3 million or 64.0% as compared to $8.3 million for the quarter ended March 31, 2022. Total interest expense was $5.6 million for the three months ended March 31, 2023, which increased $4.0 million as compared to $1.6 million for the quarter ended March 31, 2022. Net interest income was $8.0 million for the quarter ended March 31, 2023, which increased $1.3 million or 19.1% from $6,726 for the quarter ended March 31, 2022.
The 2023 increase in net interest income was primarily due to increase in average loan balances accompanied by an increase in net interest margin as rates earned on interest bearing assets increased at a faster pace than the rates paid on interest bearing liabilities. The improvement in net interest income and margin was also due to the growth in the Bank’s prepaid card business, which resulted in a significant growth in average deposits.
The net interest margin showed continued improvement, with an increase to 3.29% for the quarter ended March 31, 2023, compared with 3.06% for the quarter March 31, 2022. Compared with the quarter ended December 31, 2022, interest margins declined as the cost of deposits increased due to the significant rise in market interest rates.
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Provision for Loan Losses
Effective January 1, 2023, the Company adopted the CECL new accounting standard. For the three months ended March 31, 2023, provision for credit losses totaled $1.3 million, of which $1.7 million provision was related to loans and a credit of $402,000 was related to the off-balance-sheet exposures. No provision of loan losses was recorded for for the quarter ended March 31, 2022.
Non-interest income
Non-interest income for the three months ended March 31, 2023 was $835,000, compared to $814,000 for the three months ended March 31, 2022. The increase was primarily attributable to increased gains on sales of SBA loans along with higher non-interest income from the prepaid card program in 2023.
Non-interest expense
Non-interest expense for the three months ended March 31, 2023 increased to $7.6 million, compared to $6.4 million for the three months ended March 31, 2022. The increase in the first quarter of 2023 was primarily due to increase in salaries and benefits due to staffing increases needed to support continuing business initiatives.
Provision for income taxes
The Company reported a benefit for income taxes of $19,000 for the three months ended March 31, 2023, compared to a provision for income taxes of $311,000 for the three months ended March 31, 2022.
Liquidity
The Company’s balance sheet liquidity was 7.8% of total assets at March 31, 2023, compared to 9.3% at December 31, 2022. Liquidity including readily available off-balance sheet funding sources was 13.2% of total assets at March 31, 2023, compared to 18.0% at December 31, 2022. The readily available liquidity ratio remained well above the Company's 10% policy minimum.
The following categories of assets are considered balance sheet liquidity: cash and due from banks, federal funds sold (if any), short-term investments (if any), loans held for sale, and unpledged available-for-sale securities. In addition, off balance sheet funding sources include collateral-based borrowing available from the FHLB, correspondent bank borrowing lines, and brokered deposits subject to internal limitations.
Liquidity is a measure of the Company’s ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts. Management believes the Company’s liquid assets provide sufficient coverage to satisfy loan demand, cover potential fluctuations in deposit accounts, and to meet other anticipated operational cash requirements.
Management manages its capital resources by seeking to maintain a capital structure that will ensure an adequate level of capital to support anticipated asset growth and absorb potential losses while effectively leveraging capital to enhance profitability and return to shareholders. Dividends have not been paid to shareholders since 2020 but may resume in future periods.
The primary source of liquidity at the Company is returns of capital from the Bank. These capital returns are subject to OCC approval and are needed periodically to provide funds needed to service debt payments at the Company.
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Capital
In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk-based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. In September 2021, the Bank adopted the CBLR framework. The Bank’s Tier 1 leverage ratio as of March 31, 2023 and December 31, 2022 was 9.25% and 9.27%, respectively, which is above the well-capitalized required level of 9.0%.
Management continuously assesses the adequacy of the Bank’s capital with the goal to maintain a “well capitalized” classification.
Impact of Inflation and Changing Prices
The Company’s consolidated financial statements have been prepared in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. Notwithstanding this, inflation can directly affect the value of loan collateral, in particular, real estate. Inflation, deflation or disinflation could significantly affect the Company’s earnings in future periods.
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. The Company’s market risk is primarily limited to interest rate risk.
The Company’s goal is to maximize long term profitability while minimizing its exposure to interest rate fluctuations. The first priority is to structure and price the Company’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 the Company’s Investment, ALCO and Liquidity policies.
Management analyzes the Company’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.
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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 the Company’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 tables below set 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 the Company’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 therefore overstate the impact of short-term repricings. In certain low interest rate environments, 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. Therefore, it is not possible for the analyses to fully measure the true impact of these downward shocks.

|  | Net Portfolio Value - Performance Summary
(In thousands) |  | As of March 31, 2023 |  | As of December 31, 2022
Projected Interest Rate Scenario |  | Estimated Value |  | Change from Base ($) |  | Change from Base (%) |  | Estimated Value |  | Change from Base ($) |  | Change from Base (%)
+200 |  | $ | 102,750 |  |  | $ | (23,099) |  |  | (18.35) | % |  | $ | 146,888 |  |  | $ | (15,357) |  |  | (9.47) | %
+100 |  | 117,479 |  |  | (8,370) |  |  | (6.65) | % |  | 157,368 |  |  | (4,877) |  |  | (3.01) | %
BASE |  | 125,849 |  |  | — |  |  | — |  |  | 162,245 |  |  | — |  |  | — |
-100 |  | 130,528 |  |  | 4,679 |  |  | 3.72 | % |  | 163,472 |  |  | 1,227 |  |  | 0.76 | %
-200 |  | 124,738 |  |  | (1,111) |  |  | (0.88) | % |  | 155,386 |  |  | (6,859) |  |  | (4.23) | %

|  | Net Interest Income - Performance Summary
(In thousands) |  | March 31, 2023 |  | December 31, 2022
Projected Interest Rate Scenario |  | Estimated Value |  | Change from Base |  | Change from Base (%) |  | Estimated Value |  | Change from Base ($) |  | Change from Base (%)
+200 |  | $ | 39,636 |  |  | $ | (3,040) |  |  | (7.12) | % |  | $ | 46,131 |  |  | $ | (1,177) |  |  | (2.49) | %
+100 |  | 41,363 |  |  | (1,313) |  |  | (3.08) | % |  | 46,938 |  |  | (370) |  |  | (0.78) | %
BASE |  | 42,676 |  |  | — |  |  | — |  |  | 47,308 |  |  | — |  |  | — |
-100 |  | 44,132 |  |  | 1,456 |  |  | 3.41 | % |  | 47,657 |  |  | 349 |  |  | 0.74 | %
-200 |  | 45,171 |  |  | 2,495 |  |  | 5.85 | % |  | 46,747 |  |  | (561) |  |  | (1.19) | %

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Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Patriot maintains disclosure controls and procedures that are designed to provide reasonable assurance that information that is required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and accumulated and communicated to management in a timely fashion.
Patriot’s management, with the participation of its Chief Executive Officer and its Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of its disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, Patriot’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, Patriot’s disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. In addition, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and/or procedures may deteriorate.
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PART II - OTHER INFORMATION
Item 1: Legal Proceedings
Patriot does not have any pending legal proceedings, other than ordinary routine litigation, incidental to its business, to which Patriot is a party or any of its property is subject. Management is of the opinion that the ultimate disposition of these routine legal matters will not have a material adverse effect on the consolidated financial condition, results of operations, or liquidity of Patriot.
Item 5: Other Information
None.
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ITEM 6: Exhibits
The exhibits marked with the section symbol (#) are interactive data files.

No. |  | Description
3(i) |  | Certificate of Incorporation of Patriot National Bancorp, Inc. (incorporated by reference to Exhibit 3(i) to the Company’s Current Report on Form 8-K filed on December 1, 1999).
3(i)(A) |  | 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 the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004 filed on March 25, 2005).
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 the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on November 14, 2006).
3(i) (C) |  | Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp Inc. dated October 6, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 21, 2010)
3(ii) |  | Amended and Restated By-laws of Patriot National Bancorp, Inc. (incorporated by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed on November 1, 2010)
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
32* |  | Section 1350 Certifications
101.INS# |  | Inline XBRL Instance Document
101.SCH# |  | Inline XBRL Schema Document
101.CAL# |  | Inline XBRL Calculation Linkbase Document
101.LAB# |  | Inline XBRL Labels Linkbase Document
101.PRE# |  | Inline XBRL Presentation Linkbase Document
101.DEF# |  | Inline XBRL Definition Linkbase Document
104 |  | Cover Page Interactive Data File (embedded with the Inline XBRL and contained in Exhibit 101)

The exhibits marked with the section symbol (#) are interactive data files.
*The certification is being furnished and shall not be deemed filed.
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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.

Date: May 12, 2023 | Patriot National Bancorp, Inc. (Registrant)
| By: | /s/ Joseph D. Perillo
|  | Joseph D. Perillo
|  | Executive Vice President and Chief Financial Officer
| By: | /s/ David Lowery
|  | David Lowery
|  | President and Chief Executive Officer

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