UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


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

 

For the quarterly period ended June 30, 2018

 

OR

 

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) 324-7500

(Registrant’s telephone number, including area code)

 

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   ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☒    No   ☐

 

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

 

  

Accelerated filer

 

Non-accelerated filer

 

☐  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

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. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐    No ☒

 

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   ☐    No   ☐ 

 

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 August 8, 2018, there were 3,904,578 shares of the registrant’s common stock outstanding.

 

1

 

 

 

Table of Contents

 

Table of Contents

2

PART I- FINANCIAL INFORMATION

3

 

Item 1: Consolidated Financial Statements

3

 

Consolidated Balance Sheets (Unaudited)

3

 

Consolidated Statements of Income (Unaudited)

4

 

Consolidated Statements of Comprehensive (Loss) Income  (Unaudited)

5

 

Consolidated Statements of Shareholder's Equity (Unaudited)

6

 

Consolidated Statements of Cash Flows (Unaudited)

7

 

Note to Consolidated Financial Statements (Unaudited)

8

 

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

48

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

63

 

Item 4: Disclosure Controls and Procedures

65

PART II - OTHER INFORMATION

66

 

Item 1: Legal Proceedings

66

 

Item 6: Exhibits

67

 

SIGNATURES

69

 

2

 

 

 

PART I- FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

(In thousands, except share data)

 

June 30,
2018

   

December 31,
2017

 
                 

ASSETS

               

Cash and due from banks:

               

Noninterest bearing deposits and cash

  $ 4,589       3,582  

Interest bearing deposits

    81,052       45,659  

Total cash and cash equivalents

    85,641       49,241  

Investment securities:

               

Available-for-sale securities, at fair value

    23,982       25,576  

Other investments, at cost

    4,450       4,450  

Total investment securities

    28,432       30,026  
                 

Federal Reserve Bank stock, at cost

    2,564       2,502  

Federal Home Loan Bank stock, at cost

    5,807       5,889  

Loans receivable (net of allowance for loan losses: 2018: $6,525, 2017: $6,297)

    750,804       713,350  

Accrued interest and dividends receivable

    3,306       3,496  

Premises and equipment, net

    35,715       35,358  

Other real estate owned

    991       -  

Deferred tax asset

    11,085       10,397  

Goodwill

    2,100       -  

Core deposit intangible, net

    534       -  

Other assets

    3,256       1,821  

Total assets

  $ 930,235       852,080  
                 

Liabilities

               

Deposits:

               

Noninterest bearing deposits

  $ 83,808       81,197  

Interest bearing deposits

    628,504       556,242  

Total deposits

    712,312       637,439  
                 

Federal Home Loan Bank and correspondent bank borrowings

    110,000       120,000  

Senior notes, net

    11,740       11,703  

Subordinated debt, net

    9,576       -  

Junior subordinated debt owed to unconsolidated trust

    8,090       8,086  

Note payable

    1,484       1,580  

Advances from borrowers for taxes and insurance

    2,876       2,829  

Accrued expenses and other liabilities

    5,796       3,694  

Total liabilities

    861,874       785,331  
                 

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; 2018: 3,978,319 shares issued; 3,904,578 shares outstanding. 2017: 3,973,416 shares issued; 3,899,675 shares outstanding

    40       40  

Additional paid-in capital

    106,982       106,875  

Accumulated deficit

    (36,808 )     (38,832 )

Less: Treasury stock, at cost: 2018 and 2017, 73,741 and 73,741 shares, respectively

    (1,179 )     (1,179 )

Accumulated other comprehensive loss

    (674 )     (155 )

Total shareholders' equity

    68,361       66,749  

Total liabilities and shareholders' equity

  $ 930,235       852,080  

 

See Accompanying Notes to Consolidated Financial Statements.

 

3

 

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

   

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 

(In thousands, except per share amounts)

 

2018

   

2017

   

2018

   

2017

 
                                 

Interest and Dividend Income

                               

Interest and fees on loans

  $ 9,201       7,591       17,975       14,198  

Interest on investment securities

    291       242       557       413  

Dividends on investment securities

    128       93       249       175  

Other interest income

    270       19       421       83  

Total interest and dividend income

    9,890       7,945       19,202       14,869  
                                 

Interest Expense

                               

Interest on deposits

    1,997       1,129       3,654       2,118  

Interest on Federal Home Loan Bank borrowings

    502       183       759       261  

Interest on senior debt

    228       228       457       457  

Interest on subordinated debt

    112       89       211       174  

Interest on note payable

    10       8       17       17  

Total interest expense

    2,849       1,637       5,098       3,027  
                                 

Net interest income

    7,041       6,308       14,104       11,842  
                                 

Provision (Credit) for Loan Losses

    50       260       235       (1,489 )
                                 

Net interest income after provision (credit) for loan losses

    6,991       6,048       13,869       13,331  

Non-interest Income

                               

Loan application, inspection and processing fees

    12       15       20       36  

Deposit fees and service charges

    132       146       266       295  

Gains on sale of loans

    66       -       66       -  

Rental Income

    83       91       167       185  

Loss on sale of investment securities

    -       -       -       (78 )

Other income

    93       97       189       188  

Total non-interest income

    386       349       708       626  
                                 

Non-interest Expense

                               

Salaries and benefits

    2,854       2,497       5,623       4,927  

Occupancy and equipment expense

    776       807       1,517       1,582  

Data processing expense

    322       326       639       446  

Professional and other outside services

    457       550       1,029       1,202  

Merger and tax initiative project expenses

    592       -       1,115       -  

Advertising and promotional expense

    59       111       137       185  

Loan administration and processing expense

    30       14       43       23  

Regulatory assessments

    298       163       550       342  

Insurance expense

    53       56       108       115  

Communications, stationary and supplies

    110       103       223       190  

Other operating expense

    410       387       768       696  

Total non-interest expense

    5,961       5,014       11,752       9,708  
                                 

Income before income taxes

    1,416       1,383       2,825       4,249  
                                 

Provision for Income Taxes

    380       579       724       1,715  
                                 

Net income

  $ 1,036       804       2,101       2,534  
                                 

Basic earnings per share

  $ 0.27       0.21       0.54       0.65  

Diluted earnings per share

  $ 0.26       0.21       0.54       0.65  

 

See Accompanying Notes to Consolidated Financial Statements.

 

4

 

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

 

(In thousands)

 

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net income

  $ 1,036       804       2,101       2,534  

Other comprehensive income

                               

Unrealized holding (loss) gain on securities

    (710 )     48       (710 )     287  

Income tax effect

    191       (18 )     191       (111 )
                                 

Reclassification for realized losses on sale of investment securities

    -       -       -       (78 )

Income tax effect

    -       -       -       30  
                                 

Total other comprehensive (loss) income

    (519 )     30       (519 )     128  
                                 

Comprehensive income

  $ 517       834       1,582       2,662  

 

See Accompanying Notes to Consolidated Financial Statements.

 

5

 

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

 

(In thousands, except shares)

 

Number
of
Shares

   

Common
Stock

   

Additional
Paid-in
Capital

   

Accumulated
Deficit

   

Treasury
Stock

   

Accumulated
Other
Comprehensive
Loss

   

Total

 
                                                         
                                                         

Balance at December 31, 2017

    3,899,675     $ 40       106,875       (38,832 )     (1,179 )     (155 )     66,749  

Comprehensive income:

                                                       

Net income

    -       -       -       2,101       -       -       2,101  

Unrealized holding loss on available-for-sale securities, net of tax

    -       -       -       -       -       (519 )     (519 )

Total comprehensive income

    -       -       -       2,101       -       (519 )     1,582  

Common stock dividends

                            (77 )                     (77 )

Share-based compensation expense

    -       -       107       -       -       -       107  

Vesting of restricted stock

    4,903       -       -       -       -       -       -  

Balance at June 30, 2018

    3,904,578     $ 40       106,982       (36,808 )     (1,179 )     (674 )     68,361  
                                                         
                                                         
                                                         

Balance at December 31, 2016

    3,891,897     $ 40       106,729       (42,902 )     (1,177 )     (120 )     62,570  

Comprehensive income:

                                                       

Net income

    -       -       -       2,534       -       -       2,534  

Unrealized holding gain on available-for-sale securities, net of tax

    -       -       -       -       -       128       128  

Total comprehensive income

    -       -       -       2,534       -       128       2,662  

Share-based compensation expense

    -       -       68       -       -       -       68  

Vesting of restricted stock

    2,231       -       -       -       -       -       -  

Balance at June 30, 2017

    3,894,128     $ 40       106,797       (40,368 )     (1,177 )     8       65,300  

 

 See Accompanying Notes to Consolidated Financial Statements.

 

6

 

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   

Six Months Ended June 30,

 

(In thousands)

 

2018

   

2017

 
                 

Cash Flows from Operating Activities:

               

Net income

  $ 2,101       2,534  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Amortization of investment premiums, net

    25       53  

Amortization and accretion of purchase loan premiums and discounts

    352       260  

Amortization of debt issuance costs

    41       41  

Provision (credit) for loan losses

    235       (1,489 )

Depreciation and amortization

    716       590  

Amortization of core deposit intangible

    18       -  

Loss on sales of available-for-sale securities

    -       78  

Share-based compensation

    107       68  

(Increase) decrease in deferred income taxes

    (497 )     1,339  

Changes in assets and liabilities:

               

Decrease (increase) in accrued interest and dividends receivable

    190       (482 )

Decrease (increase) in other assets

    871       (184 )

Increase (decrease) in accrued expenses and other liabilities

    230       (1,061 )

Net cash provided by operating activities

    4,389       1,747  
                 

Cash Flows from Investing Activities:

               

Proceeds from sales on available-for-sale securities

    35,532       13,848  

Principal repayments on available-for-sale securities

    859       1,244  

Purchases of available-for-sale securities

    -       (15,567 )

Purchases of Federal Reserve Bank stock

    (62 )     (315 )

Redemptions (purchases) of Federal Home Loan Bank stock

    82       (224 )

Increase in net originations of loans receivable

    (16,436 )     (21,911 )

Purchase of loan pools receivable

    -       (73,022 )

Purchase of premises and equipment

    (1,067 )     (2,302 )

Escrow deposit for pending acquisition

    (500 )     -  

Net cash used in business combination

    (4,736 )     -  

Net cash provided by (used in) investing activities

    13,672       (98,249 )
                 

Cash Flows from Financing Activities:

               

Increase in deposits, net

    28,689       32,715  

Repayments of FHLB and correspondent bank borrowings

    (19,800 )     (18,000 )

Proceeds from issuance of subordinated debt, net

    9,576       -  

Principal repayments of note payable

    (96 )     (94 )

Decrease in advances from borrowers for taxes and insurance

    47       435  

Dividends paid on common stock

    (77 )     -  

Net cash provided by financing activities

    18,339       15,056  
                 

Net Increase (decrease) in cash and cash equivalents

    36,400       (81,446 )
                 

Cash and cash equivalents at beginning of period

    49,241       92,289  
                 

Cash and cash equivalents at end of period

  $ 85,641       10,843  
                 
                 

Supplemental Disclosures of Cash Flow Information:

               

Cash paid for interest

  $ 4,205       2,974  

Cash paid for income taxes

  $ 1,243       375  
                 
                 

Business Combination Non-Cash Disclosures

               

Assets acquired in business combination (net of cash received)

  $ 60,492       -  

Liabilities acquired in business combination

  $ 56,095       -  

Contingent liability assumed in business combination

  $ 1,761       -  

 

See Accompanying Notes to Consolidated Financial Statements.

 

7

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

 

Note 1: Basis of Financial Statement Presentation

 

The accompanying unaudited condensed consolidated financial statements of Patriot National Bancorp, Inc. (the “Company”) or (“Patriot”) and its wholly-owned subsidiaries including Patriot Bank, N.A. (the “Bank”) (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 Form 10-K for the year ended December 31, 2017.

 

The Consolidated Balance Sheet at December 31, 2017 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.

 

On May 10, 2018 the Bank completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT (“Prime Bank”). The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut. The results of Prime Bank’s operations were included in the Company’s Consolidated Financial Statements from the date of acquisition.

 

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 losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets, and business combination as certain of Patriot’s more significant accounting policies and estimates, in that they are critical to the presentation of Patriot’s 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 Patriot’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 June 30, 2018 are not necessarily indicative of the results of operations that may be expected for the remainder of 2018.

 

8

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

 

Note 2 :      Accounting Policies      

 

New Accounting Policy

 

Please refer to the summary of Significant Accounting Policies included in the Company’s 2017 Annual Report on Form 10-K for a list of all policies in effect as of December 31, 2017. The below summary is intended to provide updates or new policies required as a result of a new accounting standard or a change to the Company’s operations or assets that require a new or amended policy.

 

Acquired Loans

 

Acquired loans are initially recorded at their acquisition date fair values. The carryover of allowance for loan losses is prohibited as any credit losses in the acquired loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.

 

Acquired Impaired Loans- Purchase Credit Impaired “PCI” Loans

 

Acquired loans that exhibit evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments are accounted for as PCI loans under Accounting Standards Codification (“ASC”) 310-30. The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is accreted into interest income over the remaining life of the loans using the interest method. The difference between contractually required payments at acquisition and the undiscounted cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses and other contractually required payments that the Company does not expect to collect. Subsequent decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in expected cash flows result in a recovery of previously recorded allowance for loan losses or a reversal of a corresponding amount of the nonaccretable discount, which the Company then reclassifies as an accretable discount that is accreted into interest income over the remaining life of the loans using the interest method.

 

PCI loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, the associated allowance for credit losses related to these loans is not carried over at the acquisition date.

 

Acquired loans that met the criteria for non-accrual of interest prior to acquisition were not considered performing upon acquisition. When the customers resume payments, to make the nonaccrual loans current, the loans may return to accrual status, including the impact of any accretable discounts, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans.

 

9

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Acquired Non-impaired Loans

 

Acquired loans that do not meet the requirements under ASC 310-30 are considered acquired non-impaired loans. The difference between the acquisition date fair value and the outstanding balance represents the fair value adjustment for a loan and includes both credit and interest rate considerations. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to net interest income (or expense) over the loan’s remaining life in accordance with ASC 310-20. Fair value adjustments for revolving loans are accreted (or amortized) using a straight line method. Term loans are accreted (or amortized) using the constant effective yield method.

 

Subsequent to the purchase date, the methods used to estimate the allowance for loan losses for the acquired non-impaired loans are consistent with the policy for allowance for loan losses described in Note 5.

 

Intangible Assets

 

Intangible assets include core deposit intangibles and goodwill arising from acquisitions. The initial and ongoing carrying value of intangible assets is based upon modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows. It also requires use of a discount rate that reflects the current return requirements of the market in relation to present risk-free interest rates, required equity market premiums, peer volatility indicators, and company-specific risk indicators.

 

Core deposit intangibles are amortized on straight-line basis over a 10-year period because that is managements’ conservative estimate of the period Patriot will benefit from Prime Bank’s stable deposit base comprised of funds associated with long term customer relationships.

 

The Company will evaluate goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The annual impairment test will be conducted as of November annually. The implied fair value of a reporting unit’s goodwill is compared to its carrying amount and the impairment loss is measured by the excess of the carrying value over fair value. The fair value of each reporting unit is compared to the carrying amount of such reporting unit in order to determine if impairment is indicated.

 

C ontingent Consideration

 

Contingent consideration represents an estimate of the additional amount of purchase price consideration and is measured based on the probability that certain loans are restructured in accordance with the agreement. Resolution of the contingent consideration will result in a cash payment and will be reflected in the financial statements as a measurement period adjustment as they are finalized. Changes will be recognized as an increase or decrease to goodwill, the valuation of the related loans and the contingent consideration/purchase price.

 

10

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

New Accounting Standards

 

Accounting Standards Adopted During 2018

 

Effective January 1, 2018, the following new Accounting Standards Updates (ASUs) were adopted by the Company:

 

ASU 2014-09  

ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) including subsequent ASUs issued to clarify this Topic. The ASU, and subsequent related updates, establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most previous revenue recognition guidance, including industry-specific guidance. The ASUs are intended to increase comparability across industries. The core principle of the revenue model is that a company will recognize revenue when it transfers control of goods or services to customers, at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.

 

The Company adopted the ASU on January 1, 2018 on a modified retrospective transition approach. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements, and there was no cumulative effect adjustment to opening retained earnings as no material changes were identified in the timing of revenue recognition.

 

ASU 2016-01 and ASU 2018-03  

ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10). The ASUs included targeted amendments in connection with the recognition, measurement, presentation, and disclosure of financial instruments. The main provisions require investments in equity securities to be measured at fair value through net income, unless they qualify for a practical expedient, and require fair value changes arising from changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option to be recognized in other comprehensive income. The provisions also emphasized the existing requirement to use exit prices to measure fair value for disclosure purposes. The Company adopted the ASUs on January 1, 2018 on a modified retrospective basis. In connection with the adoption of ASU 2016-01 on January 1, 2018, we refined our methodology to estimate the fair value of our loan portfolio using an exit price notion resulting in prior-periods no longer being comparable.

 

11

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

ASU 2016-15  

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows : Classification of Certain Cash Receipts and Cash Payments . ASU 2016-15 addresses the classification of certain specific transactions presented on the Statement of Cash Flows, in order to improve consistency across entities. Debt prepayment or extinguishment, debt-instrument settlement, contingent consideration payments post-business combination, and beneficial interests in securitization transactions are specific items addressed by this ASU that may affect the Bank. Additionally, the ASU codifies the predominance principle for classifying separately identifiable cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. As of June 30, 2018, Patriot did not have any debt prepayment or extinguishment, debt-instrument settlement, contingent consideration payments post-business combination, and beneficial interests in securitization transactions. In the future, if Patriot’s such transactions warrant present, management does not envision any difficulties implementing the requirements of ASU 2016-15, as applicable.

 

ASU 2016-18

In November 2016, the FASB issued ASU 2016-18,  Statement of Cash Flows:   Restricted Cash.   The purpose of the standard is to improve consistency and comparability among companies with respect to the reporting of changes in restricted cash and cash equivalents on the Statement of Cash Flows. The ASU requires the Statement of Cash Flows to include all changes in total cash and cash equivalents, including restricted amounts, and to the extent restricted cash and cash equivalents are presented in separate line items on the Balance Sheet, disclosure reconciling the change in total cash and cash equivalents to the amounts shown on the Balance Sheet are required. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. As of June 30, 2018 and December 31, 2017, Patriot did not have restricted cash and cash equivalents separately disclosed on its Balance Sheet. In the future, if Patriot’s activities warrant presenting separate line items on its Balance Sheet for restricted cash and cash equivalents, management does not envision any difficulties implementing the requirements of ASU 2016-18, as applicable.

 

ASU 2017-09

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting , which provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718 Stock compensation. The ASU is effective to all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company does not anticipate this ASU will have a material impact on its Consolidated Financial Statements.

 

ASU 2018-04

ASU 2018-04 - Investments - Debt Securities (Topic 320) and Regulated Operations (Topic 980): The amendment in this ASU adds, amends and supersedes various paragraphs that contain SEC guidance in ASC 320, Investments-Debt Securities and ASC 980, Regulated Operations. The amendments in this ASU are effective when a registrant adopts ASU 2016-01, which for Patriot, was January 1, 2018. This amendment did not have an impact on the Company’s Consolidated Financial Statements.

 

12

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Accounting Standards Issued But Not Yet Adopted

 

ASU 2016-02

In February 2016, the FASB issued ASU No. 2016-02,  Leases.  This ASU was issued to improve the financial reporting of leasing activities and provide a faithful representation of leasing transactions and improve understanding and comparability of a lessee's financial statements. Under the new accounting guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. This ASU will require both finance and operating leases to be recognized on the balance sheet. This ASU will affect all companies and organizations that lease real estate. The FASB issued an update in January 2018 (ASU 2018-01) providing an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity's adoption of Topic 842. This ASU will become effective for interim and annual reporting periods beginning after December 15, 2018. The Company will adopt this new accounting guidance as required. Management is currently evaluating the impact of the new standard on its Consolidated Financial Statements.

 

ASU 2016-13  

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU changes the methodology for measuring credit losses on financial instruments measured at amortized cost to a current expected loss (“CECL”) model. Under the CECL model, entities will estimate credit losses over the entire contractual term of a financial instrument from the date of initial recognition of the instrument. The ASU also changes the existing impairment model for available-for-sale debt securities. In cases where there is neither the intent nor a more-likely-than-not requirement to sell the debt security, an entity will record credit losses as an allowance rather than a direct write-down of the amortized cost basis. Additionally, ASU 2016-13 notes that credit losses related to available-for-sale debt securities and purchased credit impaired loans should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018. Management is currently evaluating the impact that the standard will have on its Consolidated Financial Statements.

 

ASU 2017-04

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment: The objective of this guidance is to simplify an entity’s required test for impairment of goodwill by eliminating Step 2 from the goodwill impairment test. In Step 2 an entity measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill, an entity had to determine the fair value at the impairment date of its assets and liabilities, including any unrecognized assets and liabilities, following a procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this Update, an entity should perform its annual or quarterly goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount and record an impairment charge for the excess of the carrying amount over the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit and the entity must consider the income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This guidance is effective for a public business entity that is an SEC filer for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this standard is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

13

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

ASU 2017-08

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities , which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. Management is currently evaluating the impact the adoption of ASU 2017-08 will have on its Consolidated Financial Statements.

 

ASU 2018-02

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminated the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not effected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance in this ASU will become effective for reporting periods beginning after December 15, 2018, with early adoption permitted, and will be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Management is currently evaluating the impact that the standard will have on its Consolidated Financial Statements.

 

ASU 2018-05

ASU 2018-05 - Income Taxes (Topic 740) : Amendment to clarify situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under ASC 740 for certain income tax effects of the Tax Cuts and Jobs Act for the reporting period. As of December 31, 2017, the Company partially completed the accounting for the tax effects of enactment of the Tax Cuts and Jobs Act, and management made reasonable estimates of the effects of a reduced federal corporate income tax rate on its existing deferred tax balances. The Company will continue to make and refine its calculations during the one-year re-measurement period as additional analysis is completed. In addition, these estimates may be affected as management gains a more thorough understanding of the new tax reform legislation.

 

14

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

 

Note 3:     Business Combinations

Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding fair values becomes available.

 

Acquisition of Prime Bank

 

On May 10, 2018 the Company completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT. The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut. On the acquisition date, Prime Bank had assets with a carrying value of approximately $65 million, including investment securities with a carrying value of $36 million, loans outstanding with a carrying value of approximately $23 million, as well as deposits with a carrying value of approximately $46 million. The results of Prime Bank’s operations were included in the Company’s Consolidated Statement of Income from the date of acquisition.

 

The acquisition will enable Patriot to expand its consumer and small business relationships, lending operations, and community presence, all of which will improve key operating metrics. The goodwill recognized results from the expected synergies and potential earnings from this combination, including some future cost savings related to the operations of Prime Bank. Patriot incurred $383,000 acquisition costs, charged to operations in the first half of 2018.

 

The assets acquired and liabilities assumed from Prime Bank were recorded at their fair value as of the closing date of the merger. Goodwill of $2.1 million was recorded at the time of the acquisition. The goodwill is all deductible for income taxes over 15 years.

 

Patriot engaged independent consultants recognized as experts in the field of valuations and fair value measurements for acquisition and merger transactions. Fair values were defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

 

Loans were evaluated on an individual basis, considering the loan's underlying characteristics, types, remaining terms, annual interest rates, current market rates, loan to value ratios (LTV), loss exposure and remaining balances. The independent consultants utilized a discounted cash flow model to estimate the fair value of the loans using assumptions for probability of defaults, loss given defaults / recovery rates and foreclosure / recovery lags. ASC 310-30 Purchase Credit Impaired Loans were separately addressed with specific discount rates adjusted for an illiquidity premium.

 

To estimate the core deposit customer relationships intangible the consultants first identified the core deposits and utilized assumptions regarding the account retention rate, growth rate and float and reserve percentages. Retention rates were based on historical attrition rates based on previous transactions, the growth rate assumed no new accounts, and 3% increase in existing account balances, while the floats and reserve percentage assumed the market participant would most likely be subject to a reserve requirement given the current level of core deposits.

 

The fair value of time deposits included segmenting into certificate of deposits (“CDs”) and IRA CDs and CDs less than $100,000 and those $100,000 and above. The methodology entailed discounting the contractual cash flows of the instruments over their remaining contractual lives at prevailing market rates.

 

15

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

The following table summarizes the consideration paid by the Company in the merger with Prime Bank and the estimated fair values of the assets acquired and liabilities assumed recognized at the acquisition date:

 

(In thousands)

 

Prime Bank

 

Consideration Paid

       

Cash consideration

  $ 5,596  

Contingent consideration

    1,761  
         

Recognized amounts of identifiable assets acquired and liabilities assumed

       

Cash and cash equivalents

  $ 1,152  

Securities

    35,532  

Loans, net of allowance

    21,605  

Premises and equipment, net

    6  

Other real estate owned

    991  

Core deposit intangibles

    552  

Other assets

    1,514  

Total assets acquired

  $ 61,352  
         

Deposits

    46,184  

Borrowings

    9,800  

Other liabilities

    111  

Total liabilities assumed

  $ 56,095  

Identifiable net assets acquired

  $ 5,257  
         

Goodwill resulting from acquisition

  $ 2,100  

 

 

All securities acquired in the transaction with Prime Bank were sold at the fair value at acquisition date with no recorded gain or loss. Fair value adjustments to assets acquired and liabilities assumed will be amortized on a straight-line basis over periods consistent with the average life, useful life/ or contractual term of related assets and liabilities. The core deposit intangible will be amortized over a 10-year period using the straight-line method.

 

Under the terms of the agreement, the transaction is accounted for as an asset sale. As a result, tax basis to Prime Bank is not carried over to Patriot and deferred tax assets on Prime Bank’s books have been written off as part of the purchase accounting adjustments.

 

The cash consideration is based on the initial calculation of Prime Bank tangible book value in accordance with the agreement.  The initial cash payment made totaled $5.89 million and $1.0 million of this amount remains with the escrow agent pending resolution of the final closing tangible book value calculation.  

 

Pursuant to a letter agreement, Patriot will make an additional payment (contingent consideration) with the amount to be determined based on the curing of certain loan deficiencies.  The maximum amount payable under the letter agreement is $2.858 million and the liability under the agreement is currently estimated to be $1.761 million.  This estimate has been measured based on Patriot's assessment of the probability that certain loans are cured in accordance with the agreement.

 

The initial accounting for the business combination includes certain provisional amounts associated with the resolution of the purchase price consideration noted above.  In addition, certain other provisional amounts have been included in the determination of the fair value of the acquired assets and liabilities and changes to those underlying estimates will be reflected as measurement period adjustments within the one-year measurement period.  Those provisional amounts relate to the valuation of loans, other real estate owned, deposits, tax and other accrued liabilities of the acquired company.

 

16

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Pending Acquisition

 

Definitive Purchase Agreement

 

On February 6, 2018, the Company, Hana Small Business Lending, Inc. (“Hana SBL”), a wholly-owned subsidiary of Hana Financial, Inc. (“Hana Financial”), and three wholly-owned subsidiaries of Hana SBL entered into a definitive purchase agreement (“Purchase Agreement”) pursuant to which Patriot will acquire Hana SBL's small business administration (“SBA”) lending business.

 

Hana SBL is a fully integrated national SBA origination and servicing platform. It has originated nearly $1 billion of SBA 7(a) loans since its inception in 2006.

 

The transaction includes the purchase of approximately $120 million of SBA 7(a) loans and servicing rights relating to a pool of $370 million in loans, and the assumption of two loan securitization vehicles, currently rated “AA+” (Hana SBL Loan Trust 2014) and “A-” (Hana SBL Loan Trust 2016) by Standard and Poor’s. Total cash consideration is approximately $83 million with the assumption of approximately $41 million of liabilities. The transaction is subject to the satisfactory completion of certain due diligence requirements, purchase price adjustments at closing and the receipt of required governmental and regulatory approvals.

 

On August 2, 2018, the Company, Hana SBL and three wholly-owned subsidiaries of Hana SBL, entered into an amendment (the “Amendment”) to the Purchase Agreement. Pursuant to the Amendment, the closing date of the above referenced transaction has been extended from August 2, 2018 to August 1, 2019.

 

As a result of the proximity of the definitive purchase to the date these consolidated financial statements are being issued, Patriot is still evaluating the estimated fair values of the assets to be acquired and the liabilities to be assumed. Accordingly, the amount of any goodwill and other intangible assets to be recognized in the connection with this transaction, as well as acquisition costs incurred and expected to be incurred, are also yet to be determined. The Company incurred $313,000 of merger and acquisition expenses related to the Hana SBL acquisition for the three months ended June 30, 2018. Due to the proximity of the announced amendment the Company is now in process of determining the costs to be incurred under the amended agreement.

 

17

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

 

Note 4 : Available-for Sale Securities

 

The amortized cost, gross unrealized gains and losses and approximate fair values of available-for-sale securities at June 30, 2018 and December 31, 2017 are as follows:

 

(In thousands)

 

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
(Losses)

   

Fair
Value

 

June 30, 2018:

                               

U. S. Government agency mortgage-backed securities

  $ 6,446       -       (217 )     6,229  

Corporate bonds

    14,000       -       (799 )     13,201  

Subordinated notes

    4,500       52       -       4,552  
    $ 24,946       52       (1,016 )     23,982  
                                 

December 31, 2017:

                               

U. S. Government agency mortgage-backed securities

  $ 7,330       -       (106 )     7,224  

Corporate bonds

    14,000       -       (196 )     13,804  

Subordinated notes

    4,500       48       -       4,548  
    $ 25,830       48       (302 )     25,576  

 

 

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 June 30, 2018 and December 31, 2017:

 

(In thousands)

 

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair
Value

   

Unrealized
(Loss)

   

Fair
Value

   

Unrealized
(Loss)

   

Fair
Value

   

Unrealized
(Loss)

 

June 30, 2018:

                                               

U. S. Government agency mortgage-backed securities

  $ 3,513       (69 )     2,716       (148 )     6,229       (217 )

Corporate bonds

    7,489       (511 )     5,712       (288 )     13,201       (799 )
    $ 11,002       (580 )     8,428       (436 )     19,430       (1,016 )
                                                 

December 31, 2017:

                                               

U. S. Government agency mortgage-backed securities

  $ 4,118       (13 )     3,106       (93 )     7,224       (106 )

Corporate bonds

    13,804       (196 )     -       -       13,804       (196 )
    $ 17,922       (209 )     3,106       (93 )     21,028       (302 )

 

At June 30, 2018 and December 31, 2017, ten out of twelve and nine out of eleven available-for-sale securities had unrealized losses with an aggregate decline of 5.0% and 1.4% from the amortized cost of those securities, respectively.

 

18

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Based on its quarterly reviews, management believes that none of the losses on available-for-sale securities noted above constitute an other-than-temporary impairment (“OTTI”). The noted losses are considered temporary due to market fluctuations in available interest rates on U.S. Government agency debt, mortgage-backed securities issued by U.S. Government agencies, and corporate debt. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected. Since Patriot is not more-likely-than-not to be required to sell the investments before recovery of the amortized cost basis and does not intend to sell the securities at a loss, none of the available-for-sale securities noted are considered to be OTTI as of June 30, 2018.

 

At June 30, 2018 and December 31, 2017, available-for-sale securities of $6.2 million and $6.7 million, respectively, were pledged to the Federal Reserve Bank of New York (“FRB”), primarily to secure municipal deposits.

 

The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held at June 30, 2018 and December 31, 2017. 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

 

June 30, 2018:

                                                               

Corporate bonds

  $ -       9,000       5,000       14,000       -       8,587       4,614       13,201  

Subordinated notes

    -       4,500       -       4,500       -       4,552       -       4,552  

Available-for-sale securities with single maturity dates

    -       13,500       5,000       18,500       -       13,139       4,614       17,753  

U. S. Government agency mortgage-backed securities

    -       2,864       3,582       6,446       -       2,716       3,513       6,229  
    $ -       16,364       8,582       24,946       -       15,855       8,127       23,982  
                                                                 

December 31, 2017:

                                                               

Corporate bonds

  $ -       9,000       5,000       14,000       -       8,928       4,876       13,804  

Subordinated notes

    -       4,500       -       4,500       -       4,548       -       4,548  

Available-for-sale securities with single maturity dates

    -       13,500       5,000       18,500       -       13,476       4,876       18,352  

U. S. Government agency mortgage-backed securities

    -       3,200       4,130       7,330       -       3,107       4,117       7,224  
    $ -       16,700       9,130       25,830       -       16,583       8,993       25,576  

 

During the year to date period ended June 30, 2018, the Company sold $35.5 million securities acquired in the transaction with Prime Bank, which were sold at the fair value at acquisition date with no recorded gain or loss. Other than that, there were no sales and purchases of the Bank’s available-for-sale securities in the six-month period ended June 30, 2018. During the year to date period ended June 30, 2017, there were $13.8 million sales and $15.6 million purchases of available-for-sale securities. A loss on the sale of available-for-sale securities of $78,000 was recorded during the six months ended June 30, 2017.

 

19

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

 

Note 5 : Loans Receivable and Allowance for Loan Losses

 

Loans acquired in connection with the Prime Bank merger in May 2018 are referred to as “acquired” loans as a result of the manner in which they are accounted for. All other loans are referred to as “business activities” loans. Accordingly, selected credit quality disclosures that follow are presented separately for the originated loan portfolio and the acquired loan portfolio.

 

As of June 30, 2018 and December 31, 2017, loans receivable, net, consists of the following:

 

(In thousands)

 

June 30, 2018

   

December 31,
2017

 

Loan portfolio segment:

 

Business

Activities

Loans

   

Acquired
Loans

   

Total

   

Business

Activities

Loans

 

Commercial Real Estate

  $ 292,508       12,918       305,426       299,925  

Residential Real Estate

    146,754       -       146,754       146,377  

Commercial and Industrial

    162,568       8,108       170,676       131,161  

Consumer and Other

    78,382       882       79,264       87,707  

Construction

    46,593       -       46,593       47,619  

Construction to Permanent - CRE

    8,616       -       8,616       6,858  

Loans receivable, gross

    735,421       21,908       757,329       719,647  

Allowance for loan losses

    (6,525 )     -       (6,525 )     (6,297 )

Loans receivable, net

  $ 728,896       21,908       750,804       713,350  

 

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

 

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

 

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

The carrying amount of the acquired loans at May 10, 2018 total $21.6 million. A subset of these loans was determined to have evidence of credit deterioration at the acquisition date, which was accounted for in accordance with ASC 310-30. The purchased credit impaired loans presently maintain a carrying value of $2.4 million. The loans were evaluated for impairment through the periodic reforecasting of expected cash flows. Loans considered not impaired at acquisition date had a carrying amount of $19.2 million.

 

Information about the acquired loan portfolio subject to purchased credit impaired accounting guidance (ASC 310-30):

 

(In thousands)

 

May 10, 2018

 
         

Contractually required principal and interest at acquisition

  $ 5,816  

Contractual cash flows not expected to be collected (nonaccretable discount)

    (2,951 )

Expected cash flows at acquisition

    2,865  

Interest component of expected cash flows (accretable discount)

    (429 )

Fair value of acquired loans

  $ 2,436  

 

 

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

 

Commercial Real Estate Loans

 

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

 

Residential Real Estate Loans

 

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

 

In March 2017, Patriot purchased $73 million of residential real estate loans, including a premium of $985,000 over the book value of the loans. No residential real estate loans were purchased in the first half of 2018.

 

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.

 

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Consumer and Other Loans

 

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

 

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

 

Construction Loans

 

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

 

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

 

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

 

One time close of a construction facility with simultaneous conversion to an amortizing mortgage loan. Construction to Permanent loans combine a short term period similar to a  construction loan, generally with a variable rate, and a longer term CRE loan typically 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 pre-defined minimum debt coverage ratio and other conditions and covenants particular to the loan. Construction facilities are typically variable rate instruments that, upon conversion to an amortizing mortgage loan, reset to a fixed rate instrument that is the greater of the in-force variable rate plus a predetermined spread over a reference rate (e.g., prime) or a minimum interest rate.

 

22

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Allowance for Loan Losses

 

The following tables summarize the activity in the allowance for loan losses, allocated to segments of the loan portfolio, for the three months ended June 30, 2018 and 2017:

 

(In thousands)

 

 

Commercial
Real Estate

   

Residential
Real Estate

   

Commercial
and
Industrial

   

Consumer
and
Other

   

Construction

   

Construction
to
Permanent
- CRE

   

Unallocated

   

Total

 

Three months ended
June 30, 2018

                                                               

Allowance for loan losses:

                                                         

March 31, 2018

  $ 2,480       1,073       1,759       546       488       61       78       6,485  

Charge-offs

    -       -       -       (13 )     -       -       -       (13 )

Recoveries

    3       -       -       -       -       -       -       3  

Provisions (credits)

    (178 )     23       237       (10 )     11       19       (52 )     50  

June 30, 2018

  $ 2,305       1,096       1,996       523       499       80       26       6,525  
                                                                 

Three months ended
June 30, 2017

                                                               

Allowance for loan losses:

                                                         

March 31, 2017

  $ 2,198       1,073       1,049       583       591       77       126       5,697  

Charge-offs

    -       -       -       (13 )     -       -       -       (13 )

Recoveries

    -       -       -       -       -       -       -       -  

Provisions (credits)

    20       (32 )     404       23       (101 )     (4 )     (50 )     260  

June 30, 2017

  $ 2,218       1,041       1,453       593       490       73       76       5,944  

 

The following tables summarize the activity in the allowance for loan losses, allocated to segments of the loan portfolio, for the six months ended June 30, 2018 and 2017:

 

(In thousands)

 

 

Commercial
Real Estate

   

Residential
Real Estate

   

Commercial
and
Industrial

   

Consumer
and
Other

   

Construction

   

Construction
to
Permanent
- CRE

   

Unallocated

   

Total

 

Six months ended
June 30, 2018

                                                               

Allowance for loan losses:

                                                         

December 31, 2017

  $ 2,212       959       2,023       568       481       54       -       6,297  

Charge-offs

    -       -       -       (13 )     -       -       -       (13 )

Recoveries

    6       -       -       -       -       -       -       6  

Provisions (credits)

    (87 )     137       (27 )     (32 )     18       26       26       235  

June 30, 2018

  $ 2,305       1,096       1,996       523       499       80       26       6,525  
                                                                 

Six months ended
June 30, 2017

                                                               

Allowance for loan losses:

                                                         

December 31, 2016

  $ 1,853       534       740       641       712       69       126       4,675  

Charge-offs

    -       -       -       (13 )     -       -       -       (13 )

Recoveries

    2       -       2,769       -       -       -       -       2,771  

Provisions (credits)

    363       507       (2,056 )     (35 )     (222 )     4       (50 )     (1,489 )

June 30, 2017

  $ 2,218       1,041       1,453       593       490       73       76       5,944  

 

There was no allowance for loan losses on all acquired loans as of June 30, 2018.

 

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PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

The following tables summarize the business activity loans, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for impairment as of June 30, 2018 and December 31, 2017:

 

(In thousands)

 

 

Commercial
Real Estate

   

Residential
Real Estate

   

Commercial
and
Industrial

   

Consumer
and
Other

   

Construction

   

Construction
to
Permanent
- CRE

   

Unallocated

   

Total

 

June 30, 2018

                                                               

Allowance for loan losses:

                                                         

Individually evaluated for impairment

  $ -       -       45       -       -       -       -       45  

Collectively evaluated for impairment

    2,305       1,096       1,951       523       499       80       26       6,480  

Total allowance for loan losses

  $ 2,305       1,096       1,996       523       499       80       26       6,525  
                                                                 

Loans receivable, gross:

                                                               

Individually evaluated for impairment

  $ 4,071       3,524       1,025       770       -       -       -       9,390  

Collectively evaluated for impairment

    288,437       143,230       161,543       77,612       46,593       8,616       -       726,031  

Total loans receivable, gross

  $ 292,508       146,754       162,568       78,382       46,593       8,616       -       735,421 (1)

 

(1) The total loan receivable, gross does not include $21.9 million acquired loans which were all individually evaluated for impairment.

 

(In thousands)

 

 

Commercial
Real Estate

   

Residential
Real Estate

   

Commercial
and
Industrial

   

Consumer
and
Other

   

Construction

   

Construction
to
Permanent
- CRE

   

Unallocated

   

Total

 

December 31, 2017

                                                               

Allowance for loan losses:

                                                         

Individually evaluated for impairment

  $ -       -       251       2       -       -       -       253  

Collectively evaluated for impairment

    2,212       959       1,772       566       481       54       -       6,044  

Total allowance for loan losses

  $ 2,212       959       2,023       568       481       54       -       6,297  
                                                                 

Loans receivable, gross:

                                                               

Individually evaluated for impairment

  $ 1,977       3,336       748       692       -       -       -       6,753  

Collectively evaluated for impairment

    297,948       143,041       130,413       87,015       47,619       6,858       -       712,894  

Total loans receivable, gross

  $ 299,925       146,377       131,161       87,707       47,619       6,858       -       719,647  

 

24

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

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

 

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

 

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

 

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

 

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

 

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

 

Charge-offs, to reduce the loan to its recoverable value, generally commence after the loan is classified as “doubtful”.

 

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.

 

If an account is classified as “Loss”, 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.

 

25

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Loan Portfolio Aging Analysis  

 

The following tables summarize performing and non-performing loans receivable by portfolio segment, by aging category, by delinquency status as of June 30, 2018.

 

Business Activities Loans

 

(In thousands)

 

Performing (Accruing) Loans

                 

As of June 30, 2018:

 

30 - 59

Days
Past Due

   

60 - 89

Days
Past Due

   

90 Days
or
Greater

Past Due

   

Total

   

Current

   

Total
Performing
Loans

   

Non-accruing
Loans

   

Loans
Receivable
Gross

 

Loan portfolio segment:

                                                               

Commercial Real Estate:

                                                               

Pass

  $ 1,858       -       670       2,528       283,402       285,930       -       285,930  

Special mention

    -       -       -       -       615       615       -       615  

Substandard

    638       -       1,025       1,663       2,163       3,826       2,137       5,963  
      2,496       -       1,695       4,191       286,180       290,371       2,137       292,508  

Residential Real Estate:

                                                               

Pass

    175       -       -       175       141,841       142,016       -       142,016  

Special mention

    -       -       -       -       -       -       -       -  

Substandard

    -       -       1,516       1,516       -       1,516       3,222       4,738  
      175       -       1,516       1,691       141,841       143,532       3,222       146,754  

Commercial and Industrial:

                                                         

Pass

    2,157       1,767       -       3,924       154,144       158,068       -       158,068  

Substandard

    -       -       -       -       -       -       1,025       1,025  
      2,157       4,517       -       6,674       154,869       161,543       1,025       162,568  

Consumer and Other:

                                                               

Pass

    33       24       -       57       78,245       78,302       -       78,302  

Substandard

    -       -       -       -       -       -       80       80  
      33       24       -       57       78,245       78,302       80       78,382  

Construction:

                                                               

Pass

    -       -       -       -       37,793       37,793       -       37,793  

Substandard

    -       -       8,800       8,800       -       8,800       -       8,800  
      -       -       8,800       8,800       37,793       46,593       -       46,593  
                                                                 

Construction to Permanent - CRE:

                                                         

Pass

    -       -       -       -       8,616       8,616       -       8,616  
                                                                 

Total

  $ 4,861       4,541       12,011       21,413       707,544       728,957       6,464       735,421  
                                                                 

Loans receivable, gross:

                                                               

Pass

  $ 4,223       1,791       670       6,684       704,041       710,725       -       710,725  

Special mention

    -       2,750       -       2,750       1,340       4,090       -       4,090  

Substandard

    638       -       11,341       11,979       2,163       14,142       6,464       20,606  

Loans receivable, gross

  $ 4,861       4,541       12,011       21,413       707,544       728,957       6,464       735,421  

 

As of June 30, 2018, the loans over 90 days past due and still accruing primarily consists of one construction loan. The loan is well secured, and in process of collection. The Company is confident the collateral will serve to ultimately assure full realization of principal and interest.

 

26

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Acquired Loans

 

(In thousands)

 

Performing (Accruing) Loans

                 

As of June 30, 2018:

 

30 - 59

Days
Past Due

   

60 - 89

Days
Past Due

   

90 Days
or
Greater

Past Due

   

Total

   

Current

   

Total
Performing
Loans

   

Non-accruing
Loans

   

Loans
Receivable
Gross

 

Loan portfolio segment:

                                                               

Commercial Real Estate:

                                                               

Pass

  $ -       -       -       -       8,526       8,526       -       8,526  

Special mention

    -       -       -       -       2,537       2,537       -       2,537  

Substandard

    -       -       -       -       1,799       1,799       56       1,855  
      -       -       -       -       12,862       12,862       56       12,918  

Commercial and Industrial:

                                                         

Pass

    34       -       -       34       4,346       4,380       -       4,380  

Special mention

    267       -       -       267       794       1,061       -       1,061  

Substandard

    -       -       -       -       2,619       2,619       48       2,667  
      301       -       -       301       7,759       8,060       48       8,108  

Consumer and Other:

                                                               

Pass

    26       13       -       39       834       873       -       873  

Substandard

    -       -       -       -       -       -       9       9  
      26       13       -       39       834       873       9       882  
                                                                 

Total

  $ 327       13       -       340       21,455       21,795       113       21,908  
                                                                 

Loans receivable, gross:

                                                               

Pass

  $ 60       13       -       73       13,706       13,779       -       13,779  

Special mention

    267       -       -       267       3,331       3,598       -       3,598  

Substandard

    -       -       -       -       4,418       4,418       113       4,531  

Loans receivable, gross

  $ 327       13       -       340       21,455       21,795       113       21,908  

 

 

27

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

The following tables summarize performing and non-performing loans receivable by portfolio segment, by aging category, by delinquency status as of December 31, 2017.

 

Business Activities Loans

 

(In thousands)

 

Performing (Accruing) Loans

                 

As of December 31, 2017:

 

30 - 59

Days
Past Due

   

60 - 89

Days
Past Due

   

90 Days
or
Greater

Past Due

   

Total

   

Current

   

Total
Performing
Loans

   

Non-accruing
Loans

   

Loans
Receivable
Gross

 

Loan portfolio segment:

                                                               

Commercial Real Estate:

                                                               

Pass

  $ -       -       -       -       286,428       286,428       -       286,428  

Special mention

    -       1,121       -       1,121       9,317       10,438       -       10,438  

Substandard

    -       1,688       -       1,688       1,371       3,059       -       3,059  
      -       2,809       -       2,809       297,116       299,925       -       299,925  

Residential Real Estate:

                                                               

Pass

    1,068       255       -       1,323       140,497       141,820       -       141,820  

Special mention

    -       1,529       -       1,529       -       1,529       -       1,529  

Substandard

    -       -       -       -       -       -       3,028       3,028  
      1,068       1,784       -       2,852       140,497       143,349       3,028       146,377  

Commercial and Industrial:

                                                               

Pass

    -       2,000       375       2,375       127,057       129,432       -       129,432  

Substandard

    -       -       981       981       -       981       748       1,729  
      -       2,000       1,356       3,356       127,057       130,413       748       131,161  

Consumer and Other:

                                                               

Pass

    498       -       -       498       87,207       87,705       -       87,705  

Substandard

    -       -       -       -       -       -       2       2  
      498       -       -       498       87,207       87,705       2       87,707  

Construction:

                                                               

Pass

    -       -       -       -       47,619       47,619       -       47,619  
                                                                 

Construction to Permanent - CRE:

                                                               

Pass

    -       -       -       -       6,858       6,858       -       6,858  
                                                                 

Total

  $ 1,566       6,593       1,356       9,515       706,354       715,869       3,778       719,647  
                                                                 

Loans receivable, gross:

                                                               

Pass

  $ 1,566       2,255       375       4,196       695,666       699,862       -       699,862  

Special mention

    -       2,650       -       2,650       9,317       11,967       -       11,967  

Substandard

    -       1,688       981       2,669       1,371       4,040       3,778       7,818  

Loans receivable, gross

  $ 1,566       6,593       1,356       9,515       706,354       715,869       3,778       719,647  

 

28

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

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 June 30, 2018:

 

Business Activities Loans

                                               
                                                 

(In thousands)

 

Non-accruing Loans

         
   

30 - 59 Days
Past Due

   

60 - 89 Days
Past Due

   

90 Days
or
Greater Past Due

   

Total
Past Due

   

Current

   

Total
Non-accruing
Loans

 

As of June 30, 2018:

                                               

Loan portfolio segment:

                                               

Commercial Real Estate

                                               

Substandard

  $ -       -       2,137       2,137       -       2,137  

Residential Real Estate:

                                               

Substandard

    -       -       3,222       3,222       -       3,222  

Commercial and Industrial:

                                               

Substandard

    -       -       1,025       1,025       -       1,025  

Consumer and Other

                                               

Substandard

    -       80       -       80       -       80  

Total non-accruing loans

  $ -       80       6,384       6,464       -       6,464  

 

 

Acquired Loans

                                               
                                                 

(In thousands)

 

Non-accruing Loans

         
   

30 - 59 Days
Past Due

   

60 - 89 Days
Past Due

   

90 Days
or
Greater Past Due

   

Total
Past Due

   

Current

   

Total
Non-accruing
Loans

 

As of June 30, 2018:

                                               

Loan portfolio segment:

                                               

Commercial Real Estate

                                               

Substandard

  $ -       -       56       56       -       56  

Commercial and Industrial:

                                               

Substandard

    -       -       48       48       -       48  

Consumer and Other

                                               

Substandard

    -       -       9       9       -       9  

Total non-accruing loans

  $ -       -       113       113       -       113  

 

If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income of approximately $103,000 and $176,000 would have been recognized in income during the three and six months ended June 30, 2018, respectively.

 

29

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

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 December 31, 2017:

 

Business Activities Loans

                                               
                                                 

(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 December 31, 2017:

                                               

Loan portfolio segment:

                                               

Residential Real Estate:

                                               

Substandard

  $ -       -       3,028       3,028       -       3,028  

Commercial and Industrial:

                                               

Substandard

    -       -       748       748       -       748  

Consumer and Other

                                               

Substandard

    -       -       2       2       -       2  

Total non-accruing loans

  $ -       -       3,778       3,778       -       3,778  

 

If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income of approximately $22,000 and $43,000 would have been recognized in income during the three and six months ended June 30, 2017, respectively.

 

Additionally, certain loans for which the borrower cannot demonstrate sufficient cash flow to continue loan payments in the future and certain troubled debt restructurings (“TDRs”) are placed on non-accrual status. During the three and six months ended June 30, 2018 and 2017, no interest income was collected and recognized on non-accruing loans.

 

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, and there is six months of performance. Management considers all non-accrual loans and TDRs to be impaired. In most cases, loan payments that are past due less than 90 days, based on contractual terms, are considered collection delays and not an indication of loan impairment. The Bank considers consumer installment loans to be pools of smaller homogeneous loan balances, which are collectively evaluated for impairment.

 

30

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Troubled Debt Restructurings (“TDR”)

 

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

 

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

 

The recorded investment in TDRs was $2.9 million at June 30, 2018 and $3.0 million at December 31, 2017, respectively. All TDRs at June 30, 2018 and December 31, 2017 were performing in accordance with their modified terms and therefore, were on accrual status.

 

Business Activities Loans

               
                 

(In thousands)

               

Loan portfolio segment:

 

June 30,
2018

   

December 31,
2017

 

Commercial Real Estate

  $ 1,934       1,977  

Residential Real Estate

    992       999  

Total TDR Loans

    2,926       2,976  

Less: TDRs included in non-accrual loans

    -       -  

Total accrual TDR Loans

  $ 2,926       2,976  

 

 

There were no loans modified as TDRs and no defaults of TDRs during the three months ended June 30, 2018 and 2017. At June 30, 2018 and December 31, 2017, there were no commitments to advance additional funds under TDRs.

 

31

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Impaired Loans

 

Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs. As of June 30, 2018 and December 31, 2017, based on the on-going monitoring and analysis of the loan portfolio, impaired loans of $9.4 million and $6.8 million, respectively, were identified, for which $45,000 and $253,000 specific reserves were established, respectively. Loans not requiring specific reserves had sufficient collateral values, less costs to sell, 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.

 

At June 30, 2018 and December 31, 2017, exposure to the impaired loans was related to 14 and 12 borrowers, respectively. In all cases, appraisal reports of the underlying collateral, if any, have been obtained from independent licensed appraisal firms. For non-performing loans, the independently determined appraised values were reduced by an estimate of the costs to sell the assets, 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.

 

In addition there was $2.4 million of PCI loans acquired from Prime Bank; $2.0 million of commercial and industrial, and $0.4 million of residential real estate. All the acquired loans were considered individually with no allowance recorded. The $2.4 million PCI loans were originally recorded at fair value by the Bank on the date of acquisition.

 

The following summarizes the investment in, outstanding principal balance of, and the related allowance, if any, for impaired business activity loans as of June 30, 2018 and December 31, 2017:

 

Business Activities Loans

 

(In thousands)

 

June 30, 2018

   

December 31, 2017

 
   

Recorded
Investment

   

Principal
Outstanding

   

Related
Allowance

   

Recorded
Investment

   

Principal
Outstanding

   

Related
Allowance

 

With no related allowance recorded:

                                               

Commercial Real Estate

  $ 4,071       4,524       -       1,977       2,425       -  

Residential Real Estate

    3,524       3,557       -       3,336       3,369       -  

Commercial and Industrial

    980       1,163       -       497       683       -  

Consumer and Other

    770       842       -       690       818       -  
      9,345       10,086       -       6,500       7,295       -  
                                                 

With a related allowance recorded:

                                               

Commercial Real Estate

    -       -       -       -       -       -  

Residential Real Estate

    -       -       -       -       -       -  

Commercial and Industrial

    45       51       45       251       251       251  

Consumer and Other

    -       -       -       2       2       2  
      45       51       45       253       253       253  
                                                 

Impaired Loans, Total:

                                               

Commercial Real Estate

    4,071       4,524       -       1,977       2,425       -  

Residential Real Estate

    3,524       3,557       -       3,336       3,369       -  

Commercial and Industrial

    1,025       1,214       45       748       934       251  

Consumer and Other

    770       842       -       692       820       2  

Impaired Loans, Total

  $ 9,390       10,137       45       6,753       7,548       253  

 

32

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

The following tables summarize additional information regarding impaired loans for the three and six months ended June 30, 2018 and 2017.

 

Business Activities Loans

 

(In thousands)

 

Three Months Ended June 30,

 
   

2018

   

2017

 
   

Average
Recorded
Investment

   

Interest
Income
Recognized

   

Average
Recorded
Investment

   

Interest
Income
Recognized

 

With no related allowance recorded:

                               

Commercial Real Estate

  $ 3,250       25       6,188       75  

Residential Real Estate

    3,480       3       1,907       3  

Commercial and Industrial

    980       -       37       -  

Consumer and Other

    750       8       541       5  
      8,460       36       8,673       83  

With a related allowance recorded:

                               

Commercial Real Estate

    -       -       -       -  

Residential Real Estate

    -       -       -       -  

Commercial and Industrial

    293       -       232       -  

Consumer and Other

    3       -       -       -  
      296       -       232       -  

Impaired Loans, Total:

                               

Commercial Real Estate

    3,250       25       6,188       75  

Residential Real Estate

    3,480       3       1,907       3  

Commercial and Industrial

    1,273       -       269       -  

Consumer and Other

    753       8       541       5  

Impaired Loans, Total

  $ 8,756       36       8,905       83  

 

(In thousands)

 

Six Months Ended June 30,

 
   

2018

   

2017

 
   

Average
Recorded
Investment

   

Interest
Income
Recognized

   

Average
Recorded
Investment

   

Interest
Income
Recognized

 

With no related allowance recorded:

                               

Commercial Real Estate

  $ 2,770       49       6,213       148  

Residential Real Estate

    3,421       6       1,909       5  

Commercial and Industrial

    912       -       37       -  

Consumer and Other

    725       15       541       10  
      7,828       70       8,700       163  

With a related allowance recorded:

                               

Commercial Real Estate

    -       -       -       -  

Residential Real Estate

    -       -       -       -  

Commercial and Industrial

    244       -       232       -  

Consumer and Other

    2       -       -       -  
      246       -       232       -  

Impaired Loans, Total:

                               

Commercial Real Estate

    2,770       49       6,213       148  

Residential Real Estate

    3,421       6       1,909       5  

Commercial and Industrial

    1,156       -       269       -  

Consumer and Other

    727       15       541       10  

Impaired Loans, Total

  $ 8,074       70       8,932       163  

 

33

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

 

Note 6 :     Deposits

 

The following table presents the balance of deposits held, by category as of June 30, 2018 and December 31, 2017.

 

(In thousands)

 

June 30, 2018

   

December 31, 2017

 
                 

Non-interest bearing

  $ 83,808     $ 81,197  

Interest bearing:

               

NOW

    26,352       25,476  

Savings

    111,812       135,975  

Money market

    38,240       16,575  

Certificates of deposit, less than $250,000

    205,896       173,221  

Certificates of deposit, $250,000 or greater

    68,287       66,866  

Brokered deposits

    177,917       138,129  

Interest bearing, Total

    628,504       556,242  
                 

Total Deposits

  $ 712,312     $ 637,439  

 

 

As of June 30, 2018 total deposits consists of $44.3 million deposits acquired in connection with the Prime Bank merger.

 

34

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

 

Note 7 : Share-Based Compensation and Employee Benefit Plan

 

The Company maintains the Patriot National Bancorp, Inc. 2012 Stock Plan (the “Plan”) to provide an incentive to directors and employees of the Company by the grant of restricted stock awards (“RSA”), options, or phantom stock units. Since 2013, the Company’s practice is to grant RSAs. As of June 30, 2018 and December 31, 2017, there were no options or phantom stock units outstanding, or that have been exercised during the period then ended.

 

The Plan provides for the issuance of up to 3,000,000 shares of the Company’s common stock subject to certain limitations. As of June 30, 2018, 2,869,913 shares of stock are available for issuance under the Plan. In accordance with the terms of the Plan, the vesting of RSAs and options may be accelerated at the discretion of the Compensation Committee of the Board of Directors. The Compensation Committee sets the terms and conditions applicable to the vesting of RSAs and stock option grants. 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.

 

During the three and six months ended June 30, 2018, the Company granted 0 and 11,200 RSAs to the CEO, 0 and 2,999 RSAs to Executive Vice Presidents, and 4,124 and 4,124 RSAs to directors, respectively. There were 1,968 and 4,903 shares of restricted stock vested, 1,104 and 1,204 shares of restricted stock forfeited, respectively. All RSAs are non- participating grants.

 

During the three and six months ended June 30, 2017, the Company granted 5,084 RSAs to directors and zero RSAs to employees. There were 0 and 2,231 shares of restricted stock vested, 6,000, and 6,000 shares of restricted stock forfeited, respectively.

 

The Company recognizes compensation expense for all director and employee share-based compensation awards on a straight-line basis over the requisite service period, which is equal to the vesting schedule of each award, for each vesting portion of an award equal to its grant date fair value.

 

For the three and six months ended June 30, 2018, the Company recognized total share-based compensation expense of $54,000 and $107,000, respectively. The share-based compensation attributable to employees of Patriot amounted to $32,000 and $67,000, respectively, for the three and six months ended June 30, 2018. Included in share-based compensation expense for the three and six months ended June 30, 2018 were $22,000 and $40,000 attributable to Patriot’s external Directors, who received total compensation of $77,000 and $159,000 for each of those periods, respectively, which amounts are included in Other Operating Expenses in the Consolidated Statements of Income.

 

For the three and six months ended June 30, 2017, the Company recognized total share-based compensation expense of $25,000 and $68,000, respectively. The share-based compensation attributable to employees of Patriot amounted to $4,000 and $32,000, respectively. Included in share-based compensation expense for the three and six months ended June 30,  2017 were $21,000 and $36,000 attributable to Patriot’s external Directors, who received total compensation of $77,000 and $146,000 for each of those periods, respectively, which amounts are included in Other Operating Expenses in the Consolidated Statements of Income.

 

35

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

The following is a summary of the status of the Company’s restricted shares as of June 30, 2018 and 2017 and changes therein during the periods indicated:

 

Three months ended June 30, 2018:

 

Number
of
Shares Awarded

   

Weighted Average
Grant Date
Fair Value

 

Unvested at March 31, 2018

    37,034     $ 14.20  

Granted

    4,124     $ 18.55  

Vested

    (1,968 )   $ 16.05  

Forfeited

    (1,104 )   $ 14.15  

Unvested at June 30, 2018

    38,086     $ 14.57  
                 

Six months ended June 30, 2018:

               

Unvested at December 31, 2017

    25,870     $ 12.15  

Granted

    18,323     $ 18.07  

Vested

    (4,903 )   $ 14.93  

Forfeited

    (1,204 )   $ 14.26  

Unvested at June 30, 2018

    38,086     $ 14.57  

 

Three months ended June 30, 2017:

 

Number
of
Shares Awarded

   

Weighted Average
Grant Date
Fair Value

 

Unvested at March 31, 2017

    33,033     $ 12.55  

Granted

    5,084     $ 15.05  

Forfeited

    (6,000 )   $ 15.50  

Unvested at June 30, 2017

    32,117     $ 12.39  
                 

Six months ended June 30, 2017:

               

Unvested at December 31, 2016

    35,264     $ 12.84  

Granted

    5,084     $ 15.05  

Vested

    (2,231 )   $ 13.05  

Forfeited

    (6,000 )   $ 15.50  

Unvested at June 30, 2017

    32,117     $ 12.39  

 

 

Unrecognized compensation expense attributable to the unvested restricted shares outstanding as of June 30, 2018 amounts to $485,000, which amount is expected to be recognized over the weighted average remaining life of the awards of 2.77 years.

 

RSA Grant - Non-executive Employees

 

During the three and six months ended June 30, 2018, 0 and 100 granted shares were forfeited, respectively. During the three and six months ended June 30, 2017, none of the granted shares were forfeited. The remaining 6,200 shares continue to vest and $16,000 of compensation expense is expected to be recognized through the January 2019 vesting date.

 

36

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Retirement Plan

 

The Company offers a 401K retirement plan (the “401K”), which provides for tax-deferred salary deductions for eligible employees. Employees may choose to make voluntary contributions to the 401K, limited to an annual maximum amount as set forth periodically by the Internal Revenue Service. The Company matches 50% of such contributions, up to a maximum of six percent of an employee's annual compensation. During the three and six months ended June 30, 2018 compensation expense under the 401K aggregated $65,000 and $116,000, respectively. During the three and six months ended June 30, 2017 compensation expense under the 401K aggregated $60,000 and $94,000, respectively.

 

Dividends

 

On July 17, 2017, the Company announced its intention to make quarterly cash dividend payments. For the three and six months ended June 30, 2018, the Company paid cash dividends of $.01 per share of common stock, or an aggregated of $39,000 and $77,000, respectively. No dividend was declared and paid for the three and six months ended June 30, 2017.

 

37

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

 

Note 8 : Earnings per share

 

The Company is required to present basic earnings per share and diluted earnings per share in its Consolidated Statements of Income. 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 and six months ended June 30, 2018 and 2017:

 

(Net income in thousands)

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Basic earnings per share:

                               

Net income attributable to Common shareholders

  $ 1,036       804       2,101       2,534  
                                 

Divided by:

                               

Weighted average shares outstanding

    3,903,858       3,894,128       3,902,195       3,893,431  
                                 

Basic earnings per common share

  $ 0.27       0.21       0.54       0.65  
                                 
                                 

Diluted earnings per share:

                               

Net income attributable to Common shareholders

  $ 1,036       804       2,101       2,534  
                                 

Weighted average shares outstanding

    3,903,858       3,894,128       3,902,195       3,893,431  
                                 

Effect of potentially dilutive restricted common shares

    13,603       7,400       17,943       5,289  
                                 

Divided by:

                               

Weighted average diluted shares outstanding

    3,917,461       3,901,528       3,920,138       3,898,720  
                                 

Diluted earnings per common share

  $ 0.26       0.21       0.54       0.65  

 

38

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

 

No te 9 : 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 becomes 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 June 30, 2018 are as follows:

 

(In thousands)

       
   

As of June 30, 2018

 

Commitments to extend credit:

       

Unused lines of credit

  $ 81,743  

Undisbursed construction loans

    14,136  

Home equity lines of credit

    20,162  

Future loan commitments

    14,497  

Financial standby letters of credit

    1,286  
    $ 131,824  

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses, and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon extending credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include commercial property, residential property, deposits and securities. Patriot has established a $8,000 reserve for credit loss as of June 30, 2018, which is included in accrued expenses and other liabilities.

 

Standby letters of credit are written commitments issued by Patriot to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded at fair value and included in the Consolidated Balance Sheet.

 

39

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

 

Note 10 : 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.

 

Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. Under the instituted regulatory framework, to be considered “well capitalized”, a financial institution must generally have a Total Capital ratio of at least 10%, a Tier 1 Capital ratio of at least 8.0%, a CET1 Capital ratio at least 6.5%, and a Tier 1 Leverage Capital ratio of at least 5.0%. However, regardless of a financial institution’s ratios, the Office of Comptroller of the Currency (the “OCC”) may require increased capital ratios or impose dividend restrictions based on the other factors it considers in assessing a bank’s capital adequacy.

 

Management continuously assesses the adequacy of the Bank’s capital in order to maintain its “well capitalized” status.

 

40

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

The Company’s and the Bank’s regulatory capital amounts and ratios at June 30, 2018 and December 31, 2017 are summarized as follows:

 

(In thousands)

 

Patriot National Bancorp, Inc.

   

Patriot Bank, N.A.

 
   

June 30, 2018

   

December 31, 2017

   

June 30, 2018

   

December 31, 2017

 
   

Amount
($)

   

Ratio
(%)

   

Amount
($)

   

Ratio
(%)

   

Amount
($)

   

Ratio
(%)

   

Amount
($)

   

Ratio
(%)

 

Total Capital (to risk weighted assets):

                                                               

Actual

    77,930       9.575       74,264       10.092       95,988       11.852       83,711       11.406  

To be Well Capitalized (1)

    -       -       -       -       80,987       10.000       73,393       10.000  

For capital adequacy with Capital Buffer (2)

    -       -       -       -       79,975       9.875       67,889       9.250  

For capital adequacy

    65,108       8.000       58,868       8.000       64,790       8.000       58,715       8.000  
                                                                 

Tier 1 Capital (to risk weighted assets):

                                                               

Actual

    71,394       8.772       67,959       9.235       89,451       11.045       77,407       10.547  

To be Well Capitalized (1)

    -       -       -       -       64,790       8.000       58,715       8.000  

For capital adequacy with Capital Buffer (2)

    -       -       -       -       63,777       7.875       53,210       7.250  

For capital adequacy

    48,831       6.000       44,151       6.000       48,592       6.000       44,036       6.000  
                                                                 

Common Equity Tier 1 Capital (to risk weighted assets):

                                                               

Actual

    63,394       7.789       59,959       8.148       89,451       11.045       77,407       10.547  

To be Well Capitalized (1)

    -       -       -       -       52,642       6.500       47,706       6.500  

For capital adequacy with Capital Buffer (2)

    -       -       -       -       51,629       6.375       42,201       5.750  

For capital adequacy

    36,623       4.500       33,113       4.500       36,444       4.500       33,027       4.500  
                                                                 

Tier 1 Leverage Capital (to average assets):

                                                               

Actual

    71,394       7.974       67,959       8.219       89,451       10.029       77,407       9.360  

To be Well Capitalized (1)

    -       -       -       -       44,598       5.000       41,351       5.000  

For capital adequacy

    35,815       4.000       33,072       4.000       35,679       4.000       33,081       4.000  

 

(1)

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.

(2)

The Capital Conservation Buffer implemented by the FDIC began to be phased in beginning January 1, 2016. It was not applicable to periods prior to that date and does not apply to bank holding companies - - the Company.

 

Under the final capital rules that became effective on January 1, 2015, there was a requirement for a CET1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer become subject to progressively more stringent limitations on the percentage of earnings that may be distributed to shareholders or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

 

The capital buffer requirement is being phased in over three years beginning in 2016. The 1.25% capital conversation buffer for 2017 has been included in the minimum capital adequacy ratios in the 2017 column in the table above. The capital conversation buffer increased to 1.875% for 2018, which has been included in the minimum capital adequacy ratios in the 2018 column above.

 

41

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

The capital buffer requirement effectively raises the minimum required Total Capital ratio to 10.5%, the Tier 1 capital ratio to 8.5% and the CET1 capital ratio to 7.0% on a fully phased-in basis, which will be effective beginning on January 1, 2019. Management believes that, as of June 30, 2018, Patriot satisfies all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis, as if all such requirements were currently in effect.

 

 

Note 1 1 : 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).

 

42

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.

 

Cash and due from banks, federal funds sold , short-term investments , and accrued interest receivable and payable

The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level 1. These financial instruments are not recorded at fair value on a recurring basis.

 

Available-for- s ale s ecurities

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).

 

Other Investments  

The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund totaling $4.5 million. This investment is utilized by the Bank to satisfy its Community Reinvestment Act (“CRA”) lending requirements. As this fund operates as a private fund, shares in the fund are not publicly traded but may be redeemed with 60 days notice at cost. For that reason, the carrying amount was considered comparable to fair value.

 

Federal Reserve Bank Stock and Federal Home Loan Bank Stock

 

Shares in the Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) are purchased and redeemed based upon their $100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost.

 

Loans  

The fair value of loans are estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In connection with the adoption of ASU 2016-01 on January 1, 2018, we refined our methodology to 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.

 

43

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Deposits

The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. 

 

The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. Patriot does not record deposits at fair value on a recurring basis.

 

Senior Notes , Subordinated Note s, and Junior Subordinated Debt

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 June 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.

 

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.

 

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 June 30, 2018 and December 31, 2017:

 

(In thousands)

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

   

Significant Observable Inputs
(Level 2)

   

Significant Unobservable Inputs
(Level 3)

   

Total

 

June 30, 2018:

                               

U. S. Government agency mortgage-backed securities

  $ -       6,229       -       6,229  

Corporate bonds

    -       13,201       -       13,201  

Subordinated notes

    -       4,552       -       4,552  
                                 

Available-for-sale securities

  $ -       23,982       -       23,982  
                                 

December 31, 2017:

                               

U. S. Government agency mortgage-backed securities

  $ -       7,224       -       7,224  

Corporate bonds

    -       13,804       -       13,804  

Subordinated notes

    -       4,548       -       4,548  
                                 

Available-for-sale securities

  $ -       25,576       -       25,576  

 

44

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

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.

 

The table below presents the valuation methodology and unobservable inputs for level 3 assets measures at fair value on a non-recurring basis as of June 30, 2018 and December 31, 2017:

 

(In thousands)

 

Fair Value

 

Valuation Methodology

 

Unobservable Inputs

 

Range of Inputs

 
                           

June 30, 2018:

                         

Impaired loans

  $ 9,345  

Real Estate Appraisals

 

Discount for appraisal type

    0% - 8%  

Other real estate owned

    991  

Real Estate Appraisals

 

Discount for appraisal type

      14%    
                           

December 31, 2017:

                         

Impaired loans

  $ 6,500  

Real Estate Appraisals

 

Discount for appraisal type

    0% - 8%  

 

 

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 June 30, 2018 and December 31, 2017, 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.

 

45

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

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 June 30, 2018 and December 31, 2017:

 

(In thousands)

         

June 30, 2018

   

December 31, 2017

 
   

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

    $ 4,589       4,589       3,582       3,582  

Interest-bearing deposits due from banks

 

Level 1

      81,052       81,052       45,659       45,659  

U. S. Government agency mortgage-backed securities

 

Level 2

      6,229       6,229       7,224       7,224  

Corporate bonds

 

Level 2

      13,201       13,201       13,804       13,804  

Subordinated notes

 

Level 2

      4,552       4,552       4,548       4,548  

Other investments

 

Level 2

      4,450       4,450       4,450       4,450  

Federal Reserve Bank stock

 

Level 2

      2,564       2,564       2,502       2,502  

Federal Home Loan Bank stock

 

Level 2

      5,807       5,807       5,889       5,889  

Loans receivable, net

 

Level 3

      750,804       734,773       713,350       702,816  

Accrued interest receivable

 

Level 2

      3,306       3,306       3,496       3,496  
                                         

Financial assets, total

          $ 876,554       860,523       804,504       793,970  
                                         

Financial Liabilities:

                                       

Demand deposits

 

Level 2

    $ 83,808       83,808       81,197       81,197  

Savings deposits

 

Level 2

      111,812       111,812       135,975       135,975  

Money market deposits

 

Level 2

      38,240       38,240       16,575       16,575  

NOW accounts

 

Level 2

      26,352       26,352       25,476       25,476  

Time deposits

 

Level 2

      274,183       272,605       240,087       239,219  

Brokered deposits

 

Level 1

      177,917       177,503       138,129       137,870  

FHLB and correspondent bank borrowings

 

Level 2

      110,000       110,150       120,000       120,218  

Senior notes

 

Level 2

      11,740       11,108       11,703       11,249  

Subordinated debt

 

Level 2

      9,576       9,576       -       -  

Junior subordinated debt owed to unconsolidated trust

 

Level 2

      8,090       8,090       8,086       8,086  

Note payable

 

Level 3

      1,484       1,298       1,580       1,416  

Accrued interest payable

 

Level 2

      1,422       1,422       569       569  
                                         

Financial liabilities, total

          $ 854,624       851,964       779,377       777,850  

 

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.

 

In the normal course of its operations, Patriot assumes interest rate risk (i.e., the risk that general interest rate levels will fluctuate). As a result, the fair value of the Patriot’s financial assets and liabilities are affected when interest market rates change, which change may be either favorable or unfavorable. Management attempts to mitigate interest rate risk by matching the maturities of its financial assets and liabilities. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and the maturities of its financial assets and financial liabilities, adjusting the terms of new loans and deposits in an attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk through its available funds investment strategy.

 

46

 

 

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

 

Off-balance - sheet instruments

 

Loan commitments on which the committed interest rate is less than the current market rate were insignificant at June 30, 2018 and December 31, 2017. The estimated fair value of fee income on letters of credit at June 30, 2018 and December 31, 2017 was insignificant.

 

47

 

 

 

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

 

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

 

Certain statements contained in the Company’s public statements, including this one, and in particular in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may be forward looking and subject to a variety of risks and uncertainties. These factors include, but are not limited to: (1) changes in prevailing interest rates which would affect the interest earned on the Company’s interest earning assets and the interest paid on its interest bearing liabilities; (2) the timing of repricing 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) recent governmental initiatives that are expected to have a profound effect on the financial services industry and could dramatically change the competitive environment of the Company; (9) other legislative or regulatory changes, including those related to residential mortgages, changes in accounting standards, and Federal Deposit Insurance Corporation (“FDIC”) premiums that may adversely affect the Company; (10) the application of generally accepted accounting principles, consistently applied; (11) the fact that one period of reported results may not be indicative of future periods; (12) the state of the economy in the greater New York metropolitan area and its particular effect on the Company's customers, vendors and communities and (13) other such factors, including risk factors, as may be described in the Company’s other filings with the SEC. The following discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 30, 2017 filed with the SEC on March 30, 2018 (the “2017 Form 10-K”) and the consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q.

 

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

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified the accounting for the allowance for loan losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets and business combination, as 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 2017 Form 10-K for additional information.

 

48

 

 

Summary

 

The Company reported net income for the second quarter of 2018 of $1.0 million ($0.27 basic and $0.26 diluted earnings per share) compared to a net income of $804,000 ($0.21 basic and diluted earnings per share) for the quarter ended June 30, 2017. On a pre-tax basis, the Company earned $1.4 million for the three month period ended June 30, 2018, an increase of $33,000 compared to the second quarter of 2017.

 

For the six months ended June 30, 2018, the Company reported net income of $2.1 million ($0.54 basic and diluted earnings per share) compared to net income of $2.5 million ($0.65 basic and diluted earnings per share) for the six months ended June 30, 2017, a decrease of $433,000.

 

The net income for the six months ended June 30, 2018 is not comparable to the same period last year due to a material credit recovery that was recognized in the first quarter of 2017 and material non-recurring acquisition-related expenses recognized in the current year. Pre-tax earnings reported for the three and six months ended June 30, 2018 included non-recurring transaction expenses of $592,000 and $1.1 million, respectively, which are associated with the acquisition of Prime Bank which closed in May 2018 and the pending acquisition of Hana SBL that is underway. These non-recurring expenses will cease once the acquisitions are consummated and the acquired companies are fully integrated.

 

The quarter’s results reflect strong earnings performance and continued, measured progress. Building scale and franchise value remains on track, and the Company continues to build its management team to add specialization and depth to its lending platform and retail banking presence.

 

As of June 30, 2018, total assets increased to $930.2 million, as compared to $852.1 million at December 31, 2017. Net Loan portfolio increased $37.4 million or 5.2% from $713.4 million at December 31, 2017 to $750.8 million at June 30, 2018. Deposits continued to grow to $712.3 million at June 30, 2018, as compared to $637.4 million at December 31, 2017.

 

All of these balance sheet categories were positively impacted by the completed merger with Prime Bank, which added total assets of $61.4 million, deposits of $46.2 million and loans of $21.6 million as of the acquisition date of May 10, 2018.

 

Equity increased $1.6 million or 2.4%, from $66.7 million at December 31, 2017 to $68.3 million at June 30, 2018, primarily due to $2.1 million of net income, $107,000 of equity compensation, which offset by $519,000 of investment portfolio unrealized losses in the first half of 2018.

 

Management is very encouraged with all of the positive developments at Patriot over the first half of 2018. The Company has followed 2017, the best earnings year in Patriot’s history, with a very strong first half of 2018. While costs that were incurred to execute the completed and pending acquisitions are temporarily reducing the reported earnings, Management is confident these investments will consider “be accretive to earnings” into the second half of 2018 and then the full year of 2019.

 

The results show the strategic initiatives the Management has been putting in place since mid-2016, including key additions to the executive team and a re-focusing on the Company’s core strengths in commercial lending and retail banking, are the right initiatives for Patriot, enabling the Company to achieve a pattern of consistent earnings improvement.

 

The successful completion of the Prime Bank transaction represents another critical step in the process of building Patriot into a leading community bank. Management looks forward to the next steps, which will include the Company’s expansion into a national SBA lending platform, through the integration of the Hana SBL acquisition, and the continued building of the Company’s retail banking presence.

 

49

 

 

Financial Condition  

 

Cash and Cash Equivalents

 

Cash and cash equivalents increased $36.4 million, from $49.2 million at December 31, 2017 to $85.6 million at June 30, 2018. The increase was primarily attributable to $35.5 million proceeds from sales on securities acquired in the Prime Bank acquisition, $28.7 million increase in deposits and $4.4 million in net cash provided by operating activities during the first half of 2018. The effect of these cash inflows was partially offset by a $16.4 million cash outflow for increase in net originations of loan receivable, and $4.7 million net cash used in business combination.

 

Investments

 

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

 

   

June 30,

   

December 31,

   

Inc/(Dec)

   

Inc/(Dec)

 

(In thousands)

 

2018

   

2017

    ($)     (%)  

U. S. Government agency mortgage-backed securities

  $ 6,229       7,224       (995 )     (13.77 )%

Corporate bonds

    13,201       13,804       (603 )     (4.37 )%

Subordinated notes

    4,552       4,548       4       0.09 %

Total Available-for-Sale Securities

  $ 23,982       25,576       (1,594 )     (6.23 )%

 

 

Available-for-sale securities decreased $1.6 million or 6.2%, from $25.6 million at December 31, 2017 to $24.0 million at June 30, 2018. This decrease was primarily attributable to $859,000 repayments of principal on Government agency mortgage-backed securities and $710,000 change in unrealized losses of the available for sale securities. In the three month period ended June 30, 2018, the Company sold $35.5 million securities acquired in the Prime Bank transaction, which were sold at the fair value at acquisition date with no recorded gain or loss.

 

Loans

 

The following table provides the composition of the Company’s loan portfolio as of June 30, 2018 and December 31, 2017:

 

(In thousands)

 

June 30, 2018

   

December 31, 2017

 
   

Business

Activities Loans

   

Acquired
Loans

   

Total

   

%

   

Amount

   

%

 

Loan portfolio segment:

                                               

Commercial Real Estate

  $ 292,508       12,918       305,426       40.32 %     299,925       41.68 %

Residential Real Estate

    146,754       -       146,754       19.38 %     146,377       20.34 %

Commercial and Industrial

    162,568       8,108       170,676       22.54 %     131,161       18.23 %

Consumer and Other

    78,382       882       79,264       10.47 %     87,707       12.19 %

Construction

    46,593       -       46,593       6.15 %     47,619       6.62 %

Construction to permanent - CRE

    8,616       -       8,616       1.14 %     6,858       0.94 %

Loans receivable, gross

    735,421       21,908       757,329       100.00 %     719,647       100.00 %

Allowance for loan losses

    (6,525 )     -       (6,525 )             (6,297 )        

Loans receivable, net

  $ 728,896       21,908       750,804               713,350          

 

50

 

 

The Company’s gross loan portfolio increased $37.7 million, or 5.2%, from $719.6 million at December 31, 2017 to $757.3 million at June 30, 2018. The increase in loans was primarily attributable to $21.6 million acquired loans from Prime Bank, and $16.4 million increase in net origination of loans receivable. As of June 30, 2018, the loan pipeline is strong, and management expects continued growth. The Company will continue to add to the product lines and enhance service offerings to the customers.

 

At June 30, 2018, the net loan to deposit ratio was 105% and the net loan to total assets ratio was 81%. At December 31, 2017, these ratios were 112% and 84%, respectively.

 

Allowance for Loan Losses

 

The allowance for loan losses increased $228,000 or 3.6% from $6.3 million at December 31, 2017 to $6.5 million at June 30, 2018. The increase was primarily attributable to $235,000 provision for all loan categories.

 

The overall credit quality of the loan portfolio continues to be strong and stable. Based upon the overall assessment and evaluation of the loan portfolio at June 30, 2018, management believes the allowance for loan losses of $6.5 million, which represents 0.9% of gross loans outstanding, was adequate under prevailing economic conditions to absorb existing losses in the loan portfolio.

 

The following table provides detail of activity in the allowance for loan losses for business activities loans:

 

   

Three months ended June 30,

   

Six months ended June 30,

 

(In thousands)

 

2018

   

2017

   

2018

   

2017

 
                                 

Balance at beginning of year

  $ 6,485       5,697       6,297       4,675  

Charge-offs:

                               

Consumer and Other

    (13 )     (13 )     (13 )     (13 )

Total charge-offs

    (13 )     (13 )     (13 )     (13 )

Recoveries:

                               

Commercial Real Estate

    3       -       6       2  

Commercial and Industrial

    -       -       -       2,769  

Total recoveries

    3       -       6       2,771  
                                 

Net recoveries

    10       13       7       (2,758 )

Provision (credit) charged to earnings

    50       260       235       (1,489 )

Balance at end of year

  $ 6,525       5,944       6,525       5,944  
                                 

Ratios:

                               

Net (recoveries) charge-offs to average loans

    0.00 %     0.00 %     0.00 %     (0.45 )%

Allowance for loan losses to total loans

    0.87 %     0.83 %     0.87 %     0.83 %

 

The following table provides an allocation of allowance for loan losses by portfolio segment and the percentage of the loans to total loans:

 

(In thousands)

 

June 30, 2018

   

December 31, 2017

 
   

Allowance for

loan losses

   

% of loans

   

Allowance for

loan losses

   

% of loans

 

Commercial Real Estate

  $ 2,305       40.32 %     2,212       41.68 %

Residential Real Estate

    1,096       19.38 %     959       20.34 %

Commercial and Industrial

    1,996       22.54 %     2,023       18.23 %

Consumer and Other

    523       10.47 %     568       12.19 %

Construction

    499       6.15 %     481       6.62 %

Construction to permanent - CRE

    80       1.14 %     54       0.94 %
Unallocated     26       N/A       -       N/A  

Total

  $ 6,525       100.00 %     6,297       100.00 %

 

There was no allowance for loan losses for acquired loans as of June 30, 2018.

 

51

 

 

Non-performing Assets

 

The following table presents non-performing assets as of June 30, 2018 and December 31, 2017:

 

(In thousands)

 

June 30, 2018

   

December 31, 

2017
 
   

Business

Activities

Loans

   

Acquired
Loans

   

Total

   

Business

Activities

Loans

 

Non-accruing loans:

                               

Commercial Real Estate

  $ 2,137       56       2,193       -  

Residential Real Estate

    3,222       -       3,222       3,028  

Commercial and Industrial

    1,025       48       1,073       748  

Consumer and Other

    80       9       89       2  

Total non-accruing loans

    6,464       113       6,577       3,778  
                                 

Loans past due over 90 days and still accruing

    12,011       -       12,011       1,356  

Other real estate owned

    -       991       991       -  

Total nonperforming assets

  $ 18,475       1,104       19,579       5,134  
                                 

Nonperforming assets to total assets

    1.99 %     0.12 %     2.10 %     0.60 %

Nonperforming loans to total loans

    2.51 %     0.52 %     2.45 %     0.71 %

 

The $6.6 million of non-accrual loans at June 30, 2018 was comprised of 9 relationships from business activities loans and 3 acquired loans from Prime Bank, for which a specific reserve of $45,000 has been established.

 

The Company has obtained appraisal reports from independent licensed appraisal firms and discounted those values for estimated selling costs to determine estimated impairment.

 

The $3.8 million of non-accrual loans at December 31, 2017 was comprised of eight borrowers, for which a specific reserve of $253,000 had been established.

 

Loans greater than 90 days past due or more, and still accruing interest, were $12.0 million at June 30, 2018, as compared to $1.4 million at December 31, 2017. The $12.0 million at June 30, 2018 was comprised of two large construction loans. The loans are well secured and we are confident, if necessary, the collateral will serve to ultimately ensure full realization of principal and interest. These positions will be constantly monitored to determine if there are any developments with the borrowers, the collateral or both.

 

52

 

 

Deferred Taxes

 

Deferred tax assets increased $688,000, from $10.4 million at December 31, 2017 to $11.1 million at June 30, 2018. The increase in deferred tax assets resulted from the capitalization of certain allowable expenses for tax purposes in the 2017 income tax returns which were expensed for financial reporting purposes.

 

Patriot anticipates utilizing the net operating loss carry forwards to reduce income taxes otherwise payable on current year taxable income and net unrealized gains on the investment portfolio to the net operating loss carry forward.

 

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

 

Deposits

 

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

 

(In thousands)

 

June 30,

   

December 31,

   

Inc/(Dec)

   

Inc/(Dec)

 
   

2018

   

2017

    ($)     (%)  

Non-interest bearing

  $ 83,808       81,197       2,611       3.22 %

Interest bearing:

                               

NOW

    26,352       25,476       876       3.44 %

Savings

    111,812       135,975       (24,163 )     (17.77 )%

Money market

    38,240       16,575       21,665       130.71 %

Certificates of deposit, less than $250,000

    205,896       173,221       32,675       18.86 %

Certificates of deposit, $250,000 or greater

    68,287       66,866       1,421       2.13 %

Brokered deposits

    177,917       138,129       39,788       28.80 %

Total Interest bearing

    628,504       556,242       72,262       12.99 %
                                 

Total Deposits

  $ 712,312       637,439       74,873       11.75 %

 

Deposits increased $74.9 million or 11.8%, from $637.4 million at December 31, 2017 to $712.3 million at June 30, 2018, resulting from an increase of $46.2 million acquired deposits from the Prime Bank merger, $39.8 million in broker deposits partially offset by a decline savings deposit of $24.2 million. During the first half of 2018, several commercial and consumer clients saw cyclical draw downs in their liquid accounts, for reasons ranging from bonus allocations, business expenses, tax expenses, to loan paydowns. During the first half of 2018, the Bank experienced an expected decline of rate sensitive, non relationship deposit dollars, due to increased competition among and national banks' deposit pricing. Despite the competition and the ebb and flow of commercial client funds, the Bank has managed to remain within range of its deposit growth targets.

 

53

 

 

Borrowings

 

Total borrowings were $140.9 million and $141.4 million as of June 30, 2018 and December 31, 2017, respectively. Borrowings consist primarily of Federal Home Loan Bank (“FHLB”) advances, senior notes, subordinated notes, junior subordinated debentures and a note payable.

 

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. As of June 30, 2018, the Bank had $40.9 million of available borrowing capacity from the FHLB-B.

 

In addition, Patriot has a $2.0 million revolving line of credit with the FHLB-B. At June 30, 2018 and December 31, 2017, no funds had been borrowed under the line of credit.

 

Correspondent Bank - Line of Credit

 

Effective July 2016, Patriot entered into a Federal funds sweep and Federal funds line of credit facility agreement (the “Correspondent Bank Agreement”) with ZB, N.A. (“Zions Bank”). The purpose of the agreement is to provide a credit facility intended to satisfy overnight Federal account balance requirements and to provide for daily settlement of FRB, ACH, and other clearinghouse transactions.

 

The Correspondent Bank Agreement provides for up to $16 million in borrowings of which no borrowings were outstanding as of June 30, 2018. The Correspondent Bank Agreement is unsecured, currently requires a compensating balance of $250,000 to remain on account with Zions Bank at all times, pays interest on funds on account (e.g., Federal funds sweep, compensating balance) at variable rates depending on the total deposit, and charges interest on advances at Zions Bank’s daily Federal funds rate, which is variable.

 

In the second quarter of 2018, Patriot negotiated a similar line of credit facility for $10 million with First Tennessee Bank. The documents are expected to be signed and the line of credit put in place before the end of the third quarter.

 

Senior notes

 

On December 22, 2016, the Company issued $12 million of senior notes bearing interest at 7% per annum and maturing on December 22, 2021 (the “Senior Notes”). Interest on the Senior Notes is payable semi-annually on June 22 and December 22 of each year beginning on June 22, 2017.

 

In connection with the issuance of the Senior Notes, the Company incurred $374,000 of costs, which are being amortized over the term of the Senior Notes to recognize a constant rate of interest expense. At June 30, 2018 and December 31, 2017, $260,000 and $297,000 of unamortized debt issuance costs have been deducted from the face amount of the Senior Notes included in the Consolidated Balance Sheet.

 

The Senior Notes 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. The 7% Senior Notes are unsecured, rank equally with all other senior obligations of the Company, are not redeemable nor may they be put to the Company by the holders of the notes, and require no payment of principal until maturity.

 

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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 (the “Offering”) of $10 million of fixed-to-floating rate subordinated notes with the maturity date of June 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 will initially bear 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. Interest on the Subordinated Notes is payable beginning on December 30, 2018.

 

In connection with the issuance of the Subordinated Notes, the Company incurred $424,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense. At June 30, 2018, $424,000 of unamortized debt issuance costs have been deducted from the face amount of the Subordinated Notes included in the Consolidated Balance Sheet.

 

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.

 

At its option, exercisable on a quarterly basis, the Company may redeem the junior subordinated debentures from the Trust, which would then redeem the trust preferred securities.

 

Note Payable

 

In September 2015, the Bank purchased the property in which its Fairfield, Connecticut branch is located for approximately $2.0 million, a property it had been leasing until that date. The purchase price was primarily satisfied by issuing the seller a $2.0 million, nine-year, promissory note bearing interest at a fixed rate of 1.75% per annum. As of June 30, 2018 and December 31, 2017, the note had a balance outstanding of $1.5 million and $1.6 million, 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.

 

Equity

 

Equity increased $1.6 million from $66.7 million at December 31, 2017 to $68.3 million at June 30, 2018, primarily due to $2.1 million of year-to-date net income, $107,000 of equity compensation, which were offset by $519,000 of investment portfolio unrealized loss and $77,000 common stock dividend payments.

 

Off-Balance Sheet Commitments

 

The Company’s off-balance sheet commitments, which primarily consist of commitments to lend, increased $14.6 million from $117.2 million at December 31, 2017 to $131.8 million at June 30, 2018.

 

55

 

 

RESULTS OF OPERATIONS

 

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

 

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 June 30, 2018 and 2017:

 

(In thousands)

 

Three months ended June 30,

 
   

2018

   

2017

 
   

Daily
Average
Balance ($)

   

Interest
($)

   

Yield
(%)

   

Daily
Average
Balance ($)

   

Interest
($)

   

Yield
(%)

 

ASSETS

                                               

Interest Earning Assets:

                                               

Loans

  $ 738,338       9,201       5.00       654,997       7,591       4.65  

Cash equivalents

    66,322       270       1.63       10,822       19       0.70  

Investments

    40,464       419       4.14       35,788       335       3.75  
                                                 

Total interest earning assets

    845,124       9,890       4.69       701,607       7,945       4.54  
                                                 

Cash and due from banks

    4,522                       5,014                  

Premised and equipment, net

    35,659                       33,929                  

Allowance for loan losses

    (6,487 )                     (5,757 )                

OREO

    531                       851                  

Other assets

    18,602                       17,136                  
                                                 

Total Assets

  $ 897,951                       752,780                  
                                                 

Liabilities

                                               

Interest bearing liabilities:

                                               

Deposit

  $ 606,082       1,997       1.32       484,765       1,129       0.93  

Borrowings

    121,092       502       1.66       103,473       183       0.71  

Senior notes

    11,729       228       7.80       11,655       228       7.84  

Subordinated debt

    8,304       112       5.41       8,248       89       4.33  

Note Payable and other

    2,214       10       1.81       1,691       8       1.75  
                                                 

Total interest bearing liabilities

    749,421       2,849       1.52       609,832       1,637       1.08  
                                                 

Demand deposits

    74,477                       75,266                  

Other liabilities

    5,455                       2,539                  
                                                 

Total Liabilities

    829,353                       687,637                  
                                                 

Shareholders' equity

    68,598                       65,143                  
                                                 

Total Liabilities and Shareholders' Equity

  $ 897,951                       752,780                  
                                                 

Net interest income

            7,041                       6,308          
                                                 

Interest margin

                    3.34                       3.61  

Interest spread

                    3.17                       3.46  

 

56

 

 

The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the six months ended June 30, 2018 and 2017:

 

(In thousands)

 

Six months ended June 30,

 
   

2018

   

2017

 
   

Daily
Average
Balance ($)

   

Interest
($)

   

Yield
(%)

   

Daily
Average
Balance ($)

   

Interest
($)

   

Yield
(%)

 

ASSETS

                                               

Interest Earning Assets:

                                               

Loans

  $ 732,545       17,975       4.95       612,466       14,198       4.67  

Cash equivalents

    54,205       421       1.57       23,356       83       0.72  

Investments

    39,230       806       4.11       35,319       588       3.36  
                                                 

Total interest earning assets

    825,980       19,202       4.69       671,141       14,869       4.47  
                                                 

Cash and due from banks

    4,202                       4,766                  

Premised and equipment, net

    35,563                       33,408                  

Allowance for loan losses

    (6,435 )                     (5,255 )                

OREO

    267                       851                  

Other assets

    17,044                       17,043                  
                                                 

Total Assets

  $ 876,621                       721,954                  
                                                 

Liabilities

                                               

Interest bearing liabilities:

                                               

Deposit

  $ 588,704       3,654       1.25       474,697       2,118       0.90  

Borrowings

    120,549       759       1.27       85,554       261       0.62  

Senior notes

    11,720       457       7.86       11,645       457       7.91  

Subordinated debt

    8,196       211       5.19       8,248       174       4.25  

Note Payable

    1,882       17       1.82       1,714       17       2.00  
                                                 

Total interest bearing liabilities

    731,051       5,098       1.41       581,858       3,027       1.05  
                                                 

Demand deposits

    73,017                       73,172                  

Other liabilities

    4,356                       2,614                  
                                                 

Total Liabilities

    808,424                       657,644                  
                                                 

Shareholders' equity

    68,197                       64,310                  
                                                 

Total Liabilities and Shareholders' Equity

  $ 876,621                       721,954                  
                                                 

Net interest income

            14,104                       11,842          
                                                 

Interest margin

                    3.44                       3.56  

Interest spread

                    3.28                       3.42  

 

57

 

 

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-bearing assets and interest-bearing liabilities for the three months ended June 30, 2018 and 2017:

 

 

(In thousands)

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018 compared to 2017

   

2018 compared to 2017

 
   

Increase/(Decrease)

   

Increase/(Decrease)

 
   

Volume

   

Rate

   

Total

   

Volume

   

Rate

   

Total

 

Interest Earning Assets:

                                               

Loans

  $ 1,073       537       1,610     $ 2,813       964       3,777  

Cash equivalents

    95       156       251       109       229       338  

Investments

    46       38       84       70       148       218  
                                                 

Total interest earning assets

    1,214       731       1,945       2,992       1,341       4,333  
                                                 

Interest bearing liabilities:

                                               

Deposit

    331       537       868       583       953       1,536  

Borrowings

    31       288       319       108       390       498  

Senior notes

    -       -       -       -       -       -  

Subordinated debt

    -       23       23       -       37       37  

Note payable and other

    2       -       2       -       -       -  
                                                 

Total interest bearing liabilities

    364       848       1,212       691       1,380       2,071  
                                                 

Net interest income

  $ 850       (117 )     733     $ 2,301       (39 )     2,262  

 

 

For the quarter ended June 30, 2018, interest income increased $1.9 million or 24% as compared to the quarter ended June 30, 2017, as focused growth and diversification in the loan portfolio yielded an increase in interest income. Average loan balances increased $83.4 million or 13% as compared to the quarter ended June 30, 2017. Total interest expense increased $1.2 million or 74% as compared to the quarter ended June 30, 2017, primarily driven by $868,000 increase in interest on deposits as the result of an increase in deposit rates, and $319,000 increase in interest on borrowings.

 

For the six-month period ended June 30, 2018, interest income increased $4.3 million or 29% as compared to the six-months ended June 30, 2017. Average loan balance increased $120.1 million as compared to the six-months ended June 30, 2017, primarily driven by $21.6 million acquired loans from Prime Bank and $16.4 million new loans in the first half of 2018.

 

Net interest income was $7.0 million for the quarter ended June 30, 2018, up 12% from the corresponding 2017 period, reflecting strong loan and deposit growth. Net interest income was $14.1 million for the six months ended June 30, 2018, up 19% from the corresponding 2017 period. Net interest margin for the quarter ended June 30, 2018 was 3.34% as compared to 3.61% for the quarter ended June 30, 2017. For the six months ended June 30, 2018, net interest margin was 3.44% as compared to 3.56% for the year-ago period. The declines in margins were primarily due to higher cost of funding for borrowing and increased interest yields on deposits.

 

58

 

 

Provision (Credit) for Loan Losses

 

The provision for loan losses for the three and six months ended June 30, 2018 were $50,000 and $235,000, as compared to $260,000 and a net credit of $1.5 million for the three and six months ended June 30, 2017, respectively. The credit for loan losses in 2017 was primarily attributable to a $2.8 million insurance recovery in its Commercial and Industrial portfolio segment, which was recorded as a credit to the allowance for loan losses in the first quarter of 2017.

 

Non-interest income

 

Non-interest income increased $37,000 from $349,000 for the quarter ended June 30, 2017 to $386,000 for the quarter ended June 30, 2018. The increase was primarily attributable to a gain of $66,000 on sale of loans in the second quarter of 2018, which was partially offset by $14,000 decreases in deposit fees and $8,000 decrease in rental income.

 

For the six months ended June 30, 2018, non-interest income increased $82,000 to $708,000 as compared to $626,000 for the first half of 2017. The increase is primarily attributable to a $78,000 loss recognized on sale of investment securities in the first quarter of 2017, and gain of $66,000 on sale of loans in the second quarter of 2018, which were offset by $29,000 decreases in deposit fees and $18,000 decrease in rental income.

 

Non-interest expense

 

Non-interest expense increased $947,000 from $5.0 million for the quarter ended June 30, 2017 to $6.0 million for the quarter ended June 30, 2018. The expenses were impacted by non-recurring project costs of $592,000 primarily associated with the Prime Bank merger closed in May 2018 and the pending acquisition of Hana SBL. These non-recurring expenses will cease once the acquisitions are consummated and the acquired companies are fully integrated. As the Bank continues to grow its business activities, additional client facing and support team members were necessary. As such, salaries and benefits increased by $357,000. The total increase in non-interest expense was partially offset by $93,000 decrease in professional and $52,000 decrease in advertising and promotional expense.

 

For the six month ended June 30, 2018, non-interest expense increased $2.1 million to $11.8 million as compared to $9.7 million for the first half of 2017. The increase primarily driven by non-recurring project costs of $1.1 million for merger and tax initiative projects, and $696,000 increase in salaries and benefits.

 

Provision for income taxes

 

The provision for income taxes for the three and six months ended June 30, 2018 were $380,000 and $724,000, as compared to $579,000 and $1.7 million for the three-and six months ended June 30, 2017, respectively. The decrease mainly reflected the lower pre-tax income (due to the prior year credit to the loan loss provision) and the positive impact of the change in the Federal corporate tax rate from 35% to 21% enacted in December 2017.

 

59

 

 

Liquidity

 

The Company’s balance sheet liquidity to total assets ratio was 11.5% at June 30, 2018 compared to 8.2% at December 31, 2017. Liquidity including readily available off balance sheet funding sources was 18.9% at June 30, 2018 compared to 15.6% at December 31, 2017. The Company’s available total liquidity (readily available plus brokered deposit availability) to total assets ratio was 22.8% at June 30, 2018 compared to 18.3% at December 31, 2017.

 

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) 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.

 

60

 

 

Capital

 

The following table illustrates the Company’s and the Bank’s regulatory capital ratios as of June 30, 2018 and December 31, 2017:

 

   

Patriot National Bancorp, Inc.

   

Patriot Bank, N.A.

 

(In thousands)

 

June 30, 2018

   

December 31, 2017

   

June 30, 2018

   

December 31, 2017

 
   

Amount
($)

   

Ratio
(%)

   

Amount
($)

   

Ratio
(%)

   

Amount
($)

   

Ratio
(%)

   

Amount
($)

   

Ratio
(%)

 

Total Capital (to risk weighted assets)

    77,930       9.575       74,264       10.092       95,988       11.852       83,711       11.406  

Tier 1 Capital (to risk weighted assets)

    71,394       8.772       67,959       9.235       89,451       11.045       77,407       10.547  

Common Equity Tier 1 Capital (to risk weighted assets)

    63,394       7.789       59,959       8.148       89,451       11.045       77,407       10.547  

Tier 1 Leverage Capital (to average assets)

    71,394       7.974       67,959       8.219       89,451       10.029       77,407       9.360  

 

Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. Under the regulatory framework for prompt correction action, to be considered “well capitalized,” an institution must generally have a leverage capital ratio of at least 5.0%, CET1 capital ratio at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a total risk-based capital ratio of at least 10%. However, the OCC has the discretion to require increased capital ratios.

 

Under the final capital rules that became effective on January 1, 2015, there is a requirement for a CET1 Capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer become subject to progressively more stringent limitations on the percentage of earnings that may be distributed to shareholders or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

 

The capital buffer requirement is being phased in over three years beginning in 2016. The 1.25% capital conversation buffer for 2017 has been included in the minimum capital adequacy ratios in the 2017 column in the table above. The capital conversation buffer increased to 1.875% for 2018, which has been included in the minimum capital adequacy ratios in the 2018 column above.

 

The capital buffer requirement effectively raises the minimum required Total Capital ratio to 10.5%, the Tier 1 Capital ratio to 8.5%, and the CET1 Capital ratio to 7.0% on a fully phased-in basis, which will be effective beginning on January 1, 2019. Management believes that, as of June 30, 2018, Patriot satisfies all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis, as if all such requirements were currently in effect.

 

The increases in the ratios of the Bank’s capital as of June 30, 2018 were primarily due to the $10 million issuance of subordinated debt in June 2018. Management continuously assesses the adequacy of the Bank’s capital with the goal to maintain a “well capitalized” classification.

 

61

 

 

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.

 

 

Stock Repurchase Program

 

No shares of Patriot’s common stock were repurchased during the three and six months period ended June 30, 2018.

 

62

 

 

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.

 

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.

 

63

 

 

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. As a result of the historically low interest rate environment, the calculated effects of the 100 and 200 basis point downward shocks cannot absolutely reflect the risk to earnings and equity, since the interest rates on certain balance sheet items have approached their minimums. Therefore, it is not possible for the analyses to fully measure the true impact of these downward shocks.

 

(In thousands)

                                               
   

Net Portfolio Value - Performance Summary

 
   

As of June 30, 2018

   

As of December 31, 2017

 

Projected Interest
Rate Scenario

 

Estimated
Value

   

Change
from
Base ($)

   

Change
from
Base (%)

   

Estimated
Value

   

Change
from
Base ($)

   

Change
from
Base (%)

 

+200

    104,685       (8,836 )     (7.8 )     89,258       (13,440 )     (13.1 )

+100

    110,138       (3,384 )     (3.0 )     96,939       (5,758 )     (5.6 )

BASE

    113,522       -       -       102,697       -       -  

-100

    112,664       (857 )     (0.8 )     105,874       3,177       3.1  

-200

    110,410       (3,112 )     (2.7 )     108,657       5,959       5.8  

 

 

   

Net Interest Income - Performance Summary

 
   

June 30, 2018

   

Year ended December 31, 2017

 

Projected Interest
Rate Scenario

 

Estimated
Value

   

Change
from
Base ($)

   

Change
from
Base (%)

   

Estimated
Value

   

Change
from
Base ($)

   

Change
from
Base (%)

 

+200

    29,445       (557 )     (1.9 )     27,936       (937 )     (3.2 )

+100

    29,772       (230 )     (0.8 )     28,454       (420 )     (1.5 )

BASE

    30,002       -       -       28,873       -       -  

-100

    29,960       (42 )     (0.1 )     28,830       (43 )     (0.2 )

-200

    29,521       (481 )     (1.6 )     29,271       398       1.4  

 

64

 

 

Item 4: Disclosure Controls and Procedures 

 

The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be disclosed timely, is accumulated and communicated to management in a timely fashion. In designing and evaluating such controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management is necessarily required to use judgment in evaluating controls and procedures.

 

An evaluation of the effectiveness of the Company’s disclosure controls and procedures was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and its Chief Financial Officer, as of the end of the period covered by this report. As used herein, “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

 

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, the aforementioned officers concluded that, as of June 30, 2018, the Company’s disclosure controls and procedures were effective.

 

Internal Control over Financial Reporting

 

There were no changes in the Company’s internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

65

 

 

PART II - OTHER INFORMATION 

 

Item 1:  Legal Proceedings

 

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

 

66

 

 

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. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report 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)
   
4 Form of 6.25% Fixed to Floating Rate Subordinated Note
   

10(1)

2012 Stock Plan of Bancorp (incorporated by reference from Annex A to the Proxy Statement on Schedule 14C filed on November 1, 2011)

   

10(2)

Amended Financial Services Agreement, (incorporated by reference to Exhibit 10(a) (20) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (Commission File No. 000-29599) filed on August 8, 2014)

   

10(3)

Agreement and Plan of Merger by and among Patriot National Bancorp, Inc., Patriot Bank, National Association, Prime Bank and Jasper J. Jaser, as stockholders’ representative, dated as of August 1, 2017 (incorporated by reference to Exhibit 10(a) (21) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 filed on August 11, 2017)

   

10(4)

Asset Purchase Agreement by and among Hana Small Business Lending, Inc.; Hana ABS  2014-1, LLC; Hana Investment, LLC and Patriot Bank, N.A., dated as of February 2, 2018 (incorporated by reference to Exhibit 10(a) (26) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed on March 30, 2018).

   

10(5)

Amendment to Asset Purchase Agreement by and among Hana Small Business Lending, Inc.; Hana ABS  2014-1, LLC; Hana Investment, LLC and Patriot Bank, N.A., dated as of August 2, 2018

   

10(6)

Form of Subordinated Note Purchase Agreement

   
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

 

67

 

 

101.INS#

XBRL Instance Document

 

101.SCH#

XBRL Schema Document

 

101.CAL#

XBRL Calculation Linkbase Document

 

101.LAB#

XBRL Labels Linkbase Document

 

101.PRE#

XBRL Presentation Linkbase Document

 

101.DEF#

XBRL Definition Linkbase Document

 

The exhibits marked with the section symbol (#) are interactive data files.

 

* The certification is being furnished and shall not be deemed filed.

 

68

 

 

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: August 14, 2018

 

  Patriot National Bancorp, Inc. (Registrant)
   
   
  By:  /s/ Joseph D. Perillo                                                           
 

Joseph D. Perillo

Executive Vice President and Chief Financial Officer

 

69

Exhibit 4

 

SUBORDINATED NOTE

 

PATRIOT NATIONAL BANCORP, INC.

6.25 % FIXED TO FLOATING Subo rdinated Note due JUNE 30 , 2028

 

THE INDEBTEDNESS EVIDENCED BY THIS SUBORDINATED NOTE IS SUBORDINATED AND JUNIOR IN RIGHT OF PAYMENT TO SENIOR INDEBTEDNESS (AS DEFINED IN SECTION 3 OF THIS SUBORDINATED NOTE) OF PATRIOT NATIONAL BANCORP, INC. (THE “ COMPANY ”), INCLUDING OBLIGATIONS OF THE COMPANY TO ITS GENERAL CREDITORS AND SECURED CREDITORS, AND IS UNSECURED. IT IS INELIGIBLE AS COLLATERAL FOR ANY EXTENSION OF CREDIT BY THE COMPANY OR ANY OF ITS SUBSIDIARIES. IN THE EVENT OF LIQUIDATION ALL HOLDERS OF SENIOR INDEBTEDNESS OF THE COMPANY SHALL BE ENTITLED TO BE PAID IN FULL WITH SUCH INTEREST AS MAY BE PROVIDED BY LAW BEFORE ANY PAYMENT SHALL BE MADE ON ACCOUNT OF PRINCIPAL OF OR INTEREST ON THIS SUBORDINATED NOTE. AFTER PAYMENT IN FULL OF ALL SUMS OWING TO SUCH HOLDERS OF SENIOR INDEBTEDNESS, THE HOLDER OF THIS SUBORDINATED NOTE, TOGETHER WITH THE HOLDERS OF ANY OBLIGATIONS OF THE COMPANY RANKING ON A PARITY WITH THE SUBORDINATED NOTES, SHALL BE ENTITLED TO BE PAID FROM THE REMAINING ASSETS OF THE COMPANY THE UNPAID PRINCIPAL AMOUNT OF THIS SUBORDINATED NOTE PLUS ACCRUED AND UNPAID INTEREST THEREON BEFORE ANY PAYMENT OR OTHER DISTRIBUTION, WHETHER IN CASH, PROPERTY OR OTHERWISE, SHALL BE MADE (i) with respect to any obligation that by its terms expressly is junior in the right of payment to the Subordinated Notes, (ii) with respect to the existing junior subordinated debentures of the Company (underlying the outstanding trust preferred securities) as of the date of the issuance of this Subordinated Note to which this Subordinated Note shall be senior, (iii) with respect to any indebtedness between the Company and any of its subsidiaries or affiliates, or (iv) on account OF ANY SHARES OF CAPITAL STOCK OF THE COMPANY.

 

THE INDEBTEDNESS EVIDENCED BY THIS SUBORDINATED NOTE IS NOT A DEPOSIT AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY OR FUND.

 

THIS SUBORDINATED NOTE WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN MINIMUM DENOMINATIONS OF $1,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SUBORDINATED NOTE IN A DENOMINATION OF LESS THAN $1,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SUBORDINATED NOTE FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PAYMENTS ON THIS SUBORDINATED NOTE, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SUBORDINATED NOTE.

 

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THIS SUBORDINATED NOTE MAY BE SOLD ONLY IN COMPLIANCE WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS. THIS SUBORDINATED NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”), OR ANY APPLICABLE STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SUBORDINATED NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

CERTAIN ERISA CONSIDERATIONS :

 

THE HOLDER OF THIS SUBORDINATED NOTE, OR ANY INTEREST HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT PLAN, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ ERISA ”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “ CODE ”) (EACH A “ PLAN ”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SUBORDINATED NOTE OR ANY INTEREST HEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SUBORDINATED NOTE, OR ANY INTEREST HEREIN, ARE NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE AND HOLDING. ANY PURCHASER OR HOLDER OF THIS SUBORDINATED NOTE OR ANY INTEREST HEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER: (I) IT IS NOT AN EMPLOYEE BENEFIT PLAN OR OTHER PLAN TO WHICH TITLE I OF ERISA OR SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLANS, OR ANY OTHER PERSON OR ENTITY USING THE “PLAN ASSETS” OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLANS TO FINANCE SUCH PURCHASE OR (II) SUCH PURCHASE OR HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH FULL EXEMPTIVE RELIEF IS NOT AVAILABLE UNDER APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

 

ANY FIDUCIARY OF ANY PLAN WHO IS CONSIDERING THE ACQUISITION OF THIS SUBORDINATED NOTE OR ANY INTEREST HEREIN SHOULD CONSULT WITH HIS OR HER LEGAL COUNSEL PRIOR TO ACQUIRING THIS SUBORDINATED NOTE OR ANY INTEREST HEREIN.

 

A-2

 
No. [ ] CUSIP (QIBs) [ ] / [ ]

     

PATRIOT NATIONAL BANCORP, INC.

 

6.25 % FIXED TO FLOATING RATE Subordinated Note due jUNE 30 , 2028

 

1.      Subordinated Notes . This Subordinated Note is one of an issue of notes of Patriot National Bancorp, Inc., a Connecticut corporation (the “ Company ”) designated as the “6.25% Fixed to Floating Rate Subordinated Notes due June 30, 2028” (the “ Subordinated Notes ”) issued pursuant to that Subordinated Note Purchase Agreement, dated as of the Issue Date (defined below), between the Company and the several purchasers of the Subordinated Notes identified on the signature pages thereto (the “ Purchase Agreement ”).

 

2.      Payment . The Company, for value received, promises to pay to U.S. Bank, NA for the benefit of [ ], or its registered assigns, the principal sum of [ ] Dollars (U.S.) ($[ ]), plus accrued but unpaid interest on June 30, 2028 (“ Stated Maturity ”) and to pay interest thereon (i) from and including the original issue date of the Subordinated Notes to but excluding June 30, 2023 or the earlier redemption date contemplated by Section 4 of this Subordinated Note, at the rate of 6.25% per annum, computed on the basis of a 360-day year consisting of twelve 30-day months and payable semi-annually in arrears on June 30 and December 30 of each year (each, a “ Fixed Interest Payment Date ”), beginning December 30, 2018, and (ii) from and including June 30, 2023 to but excluding the Stated Maturity or the earlier redemption date contemplated by Section 4 of this Subordinated Note, at the rate per annum, reset quarterly, equal to LIBOR determined on the Interest Determination Date (as defined below) of the applicable interest period plus 332.5 basis points, computed on the basis of a 360-day year and the actual number of days elapsed and payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year (each, a “ Floating Interest Payment Date ”).

 

(a)     An “ Interest Payment Date ” is either a Fixed Interest Payment Date or a Floating Interest Payment Date, as applicable.

 

(b)     “ LIBOR ” means the London interbank offered rate for deposits in U.S. dollars having an index maturity of three months in amounts of at least $1,000,000, as that rate appears on Reuters screen page “LIBOR01” (or any successor or replacement page) at approximately 11:00 a.m., London time, on the second London Banking Day (as defined below) prior to the first day of the applicable floating rate interest period (the “ Interest Determination Date ”). A “ London Banking Day ” means any day on which dealings in deposits in U.S. dollars are transacted in the London interbank market.

 

(i)     If no offered rate appears on Reuters screen page “LIBOR01” on the relevant Interest Determination Date at approximately 11:00 a.m., London time, then the Company will select four major banks in the London interbank market and will request each of their principal London offices to provide a quotation of the rate at which three-month deposits in U.S. dollars in amounts of at least $1,000,000 are offered by it to prime banks in the London interbank market, on that date and at that time, that is representative of single transactions at that time. If at least two quotations are provided, LIBOR will be the arithmetic average (rounded upward, if necessary, to the nearest .00001 of 1%) of the quotations provided.

 

A-3

 

 

(ii)     If fewer than two such quotations contemplated by Section 2(b)(i) above are provided or are available, the Company will select three major banks in New York City and will request each of them to provide a quotation of the rate offered by it at approximately 11:00 a.m., New York City time, on the Interest Determination Date for loans in U.S. dollars to leading European banks having an index maturity of three months for the applicable interest period in an amount of at least $1,000,000 that is representative of single transactions at that time. If three quotations are provided, LIBOR will be the arithmetic average (rounded upward, if necessary, to the nearest .00001 of 1%) of the quotations provided.

 

(iii)     If (A) fewer than the two quotations contemplated by Section 2(b)(i) above, and (B) fewer than the three quotations contemplated by Section 2(b)(i i ) above are provided or are available, the Company, after consulting such sources as it reasonably deems in good-faith to be comparable to any of the foregoing quotations or display page, or any such source as it deems reasonable from which to estimate LIBOR or any of the foregoing lending rates, shall determine LIBOR for the applicable interest period in its sole discretion.

 

(iv)     Notwithstanding the foregoing clauses (i) , (ii) and (iii) of this Section 2 :

 

(1)     If the Company reasonably determines in good faith on the relevant Interest Determination Date that the LIBOR base rate has been discontinued, then the Company will use a substitute or successor base rate that it has determined in its sole reasonable discretion is most comparable to the LIBOR base rate, provided that if the Company reasonably determines in good faith that there is an industry-accepted substitute or successor base rate, then the Company shall use such substitute or successor base rate (such rate, together with any rate determined by the Company pursuant to Section 2(b)(ii) , the “ Alternative Rate ”);

 

(2)     If the Company has determined to utilize a substitute or successor base rate in accordance with the foregoing, the Company in its sole reasonable discretion may determine what business day convention to use, the definition of business day, the Interest Determination Date to be used and any other relevant methodology for calculating such substitute or successor base rate, including any adjustment factor needed to make such substitute or successor base rate comparable to the LIBOR base rate, in a manner that is consistent with industry-accepted practices for such substitute or successor base rate; and

 

(3)     The Company shall provide each Noteholder with notice of its determination of an Alternative Rate promptly after such determination. If, within five Business Days after providing such notice, the Company is notified by the Noteholders of at least a majority in principal amount of the outstanding Subordinated Notes that such Noteholders reasonably believe that the determination of such Alternative Rate is not consistent with this Section 2 , then the Noteholders of at least a majority in principal amount of the outstanding Subordinated Notes, each using their commercially reasonable judgment, shall determine the Alternative Rate. In the event the Noteholders of a majority in principal amount of the outstanding Subordinated Notes cannot reach agreement on such Alternative Rate within fifteen (15) Business Days of the Company’s notification of its proposed Alternative Rate under this Section, the Alternative Rate shall be the rate identified by the Noteholder of the largest principal amount of Subordinated Notes, selected based on such Noteholder’s commercially reasonable judgment.

 

A-4

 

 

(v)     Notwithstanding the foregoing, in the event that LIBOR as determined in accordance with this Section 2 is less than zero, the LIBOR for such interest period shall be deemed to be zero.

 

Any payment of principal of or interest on this Subordinated Note that would otherwise become due and payable on a day which is not a Business Day shall become due and payable on the next succeeding Business Day, with the same force and effect as if made on the date for payment of such principal or interest, and no interest will accrue in respect of such payment for the period after such day. The term “ Business Day ” means any day that is not a Saturday or Sunday and that is not a day on which banks in the State of Connecticut are generally authorized or required by law or executive order to be closed.

 

3.      Subordination .

 

(a)     The indebtedness of the Company evidenced by this Subordinated Note, including the principal and interest on this Subordinated Note, shall be subordinate and junior in right of payment to the prior payment in full of all existing claims of creditors of the Company whether now outstanding or subsequently created, assumed, guaranteed or incurred (collectively, “ Senior Indebtedness ”), which shall consist of principal of (and premium, if any) and interest, if any, on: (i) all indebtedness and obligations of, or guaranteed or assumed by, the Company for money borrowed, whether or not evidenced by bonds, debentures, securities, notes or other similar instruments, and including, but not limited to, and all obligations to the Company’s general creditors and secured creditors; (ii) any deferred obligations of the Company for the payment of the purchase price of property or assets acquired other than in the ordinary course of business; (iii) all obligations, contingent or otherwise, of the Company in respect of any letters of credit, bankers’ acceptances, security purchase facilities and similar direct credit substitutes; (iv) any capital lease obligations of the Company; (v) all obligations of the Company in respect of interest rate swap, cap or other agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts, commodity contracts and other similar arrangements or derivative products; (vi) any obligation of the Company to its general creditors, as defined for purposes of the capital adequacy regulations of the Board of Governors of the Federal Reserve System (the “ Federal Reserve ”) applicable to the Company, as the same may be amended or modified from time to time, (vii) all obligations that are similar to those in clauses (i) through (v) of other persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise arising from an off-balance sheet guarantee; and (vii) all obligations of the types referred to in clauses (i) through (vi) of other persons secured by a lien on any property or asset of the Company, and (viii) in the case of (i) through (viii) above, all amendments, renewals, extensions, modifications and refundings of such indebtedness and obligations; except “Senior Indebtedness” does not include (A) the Subordinated Notes, (B) any obligation that by its terms expressly is junior to, or ranks equally in right of payment with, the Subordinated Notes, (C) the existing junior subordinated debentures of the Company (underlying the outstanding trust preferred securities) as of the date of the issuance of this Subordinated Note to which this Subordinated Note shall be senior, or (D) any indebtedness between the Company and any of its subsidiaries or Affiliates. This Subordinated Note is not secured by any assets of the Company or any subsidiary or Affiliate of the Company. The term “ Affiliate(s) ” means, with respect to any Person (as such term is defined in the Purchase Agreement), such Person’s immediate family members, partners, members or parent and subsidiary corporations, and any other Person directly or indirectly controlling, controlled by, or under common control with said Person and their respective Affiliates.

 

A-5

 

 

(b)     In the event of any liquidation of the Company, holders of Senior Indebtedness of the Company shall be entitled to be paid in full with such interest as may be provided by law before any payment shall be made on account of principal of or interest on this Subordinated Note. Additionally, in the event of any insolvency, dissolution, assignment for the benefit of creditors or any liquidation or winding up of or relating to the Company, whether voluntary or involuntary, holders of Senior Indebtedness shall be entitled to be paid in full before any payment shall be made on account of the principal of or interest on the Subordinated Notes, including this Subordinated Note. In the event of any such proceeding, after payment in full of all sums owing with respect to the Senior Indebtedness, the registered holders of the Subordinated Notes from time to time (each a “ Noteholder ” and, collectively, the “ Noteholders ”), together with the holders of any obligations of the Company ranking on a parity with the Subordinated Notes, shall be entitled to be paid from the remaining assets of the Company the unpaid principal thereof, and the unpaid interest thereon before any payment or other distribution, whether in cash, property or otherwise, shall be made (i) with respect to any obligation that by its terms expressly is junior to in the right of payment to the Subordinated Notes, (ii) with respect to the existing junior subordinated debentures of the Company (underlying the outstanding trust preferred securities) as of the date of the issuance of this Subordinated Note to which this Subordinated Note shall be senior, (iii) with respect to any indebtedness between the Company and any of its subsidiaries or Affiliates or (iv) on account of any capital stock.

 

(c)     If there shall have occurred and be continuing (i) a default in any payment with respect to any Senior Indebtedness or (ii) an event of default with respect to any Senior Indebtedness as a result of which the maturity thereof is accelerated, unless and until such payment default or event of default shall have been cured or waived or shall have ceased to exist, no payments shall be made by the Company with respect to the Subordinated Notes, notwithstanding the provisions of Section 18 hereof. The provisions of this paragraph shall not apply to any payment with respect to which Section 3 (b) above would be applicable.

 

(d)     Nothing herein shall act to prohibit, limit or impede the Company from issuing additional debt of the Company having the same rank as the Subordinated Notes or which may be junior or senior in rank to the Subordinated Notes. Each Noteholder, by its acceptance hereof, agrees to and shall be bound by the provisions of this Section 3 . Each Noteholder, by its acceptance hereof, further acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration for each holder of any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance of the Subordinated Notes, to acquire and continue to hold, or to continue to hold, such Senior Indebtedness, and such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold or in continuing to hold such Senior Indebtedness.

 

A-6

 

 

4.      Redemption .

 

(a)      Redemption Prior to Fifth Anniversary . This Subordinated Note shall not be redeemable by the Company in whole or in part prior to the fifth anniversary of the date upon which this Subordinated Note was originally issued (the “ Issue Date ”), except in the event of: (i) a Tier 2 Capital Event (as defined below); (ii) a Tax Event (as defined below); or (iii) an Investment Company Event (as defined below). Upon the occurrence of a Tier 2 Capital Event, a Tax Event or an Investment Company Event, subject to Section 4(f) below, the Company may redeem this Subordinated Note in whole or in part at any time, upon giving not less than 10 calendar days’ notice to the Noteholder of this Subordinated Note at an amount equal to 100% of the outstanding principal amount being redeemed plus accrued but unpaid interest, to but excluding the redemption date. “ Tier 2 Capital Event ” means the receipt by the Company of an opinion of counsel to the Company to the effect that there is a material risk that the Subordinated Note no longer qualifies as “Tier 2” Capital (as defined by the Federal Reserve) (or its then equivalent) as a result of a change in interpretation or application of law or regulation by any judicial, legislative or regulatory authority that becomes effective after the Issue Date. “ Tax Event ” means the receipt by the Company of an opinion of counsel to the Company that as a result of any amendment to, or change (including any final and adopted (or enacted) prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, there is a material risk that interest payable by the Company on the Subordinated Notes is not, or within 120 days after the receipt of such opinion will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes. “ Investment Company Event ” means the receipt by the Company of an opinion of counsel to the Company to the effect that there is a material risk that the Company is or, within 120 days after the receipt of such opinion will be, required to register as an investment company pursuant to the Investment Company Act of 1940, as amended.

 

(b)      Redemption on or after Fifth Anniversary . On or after the fifth anniversary of the Issue Date, subject to Section 4(f) below, this Subordinated Note shall be redeemable at the option of and by the Company, in whole or in part at any time and from time to time upon any Interest Payment Date, at an amount equal to 100% of the outstanding principal amount being redeemed plus accrued but unpaid interest, to but excluding the redemption date, but in all cases in a principal amount with integral multiples of $1,000. In addition, the Company may redeem all or a portion of the Subordinated Notes, at any time upon the occurrence of a Tier 2 Capital Event, Tax Event or an Investment Company Event.

 

(c)      Partial Redemption . If less than the then outstanding principal amount of this Subordinated Note is redeemed, (i) a new Subordinated Note shall be issued representing the unredeemed portion without charge to the holder thereof and (ii) such redemption shall be effected on a pro rata basis as to the Noteholders. For purposes of clarity, upon a partial redemption, a like percentage of the principal amount of every Subordinated Note held by every Noteholder shall be redeemed.

 

(d)      No Redemption at Option of Noteholder . This Subordinated Note is not subject to redemption at the option of the holder of this Subordinated Note.

 

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(e)      Effectiveness of Redemption . If notice of redemption has been duly given and notwithstanding that this Subordinated Note has been called for redemption but has not yet been surrendered for cancellation, on and after the date fixed for redemption interest shall cease to accrue on the portion of this Subordinated Note called for redemption, this Subordinated Note shall no longer be deemed outstanding with respect to the portion called for redemption and all rights with respect to the portion of this Subordinated Note called for redemption shall forthwith on such date fixed for redemption cease and terminate unless the Company shall default in the payment of the redemption price, except only the right of the Noteholder hereof to receive the amount payable on such redemption, without interest.

 

(f)      Regulatory Approvals . Any such redemption shall be subject to receipt of any and all required federal and state regulatory approvals, including, but not limited to, the consent of the Federal Reserve. In the case of any redemption of this Subordinated Note pursuant to paragraphs (b) or (c) of this Section 4 , the Company will give the Noteholder hereof notice of redemption, which notice shall indicate the aggregate principal amount of Subordinated Notes to be redeemed, not less than 30 nor more than 45 calendar days prior to the proposed redemption date.

 

(g)      Purchase and Resale of the Subordinated Notes . Subject to any required federal and state regulatory approvals and the provisions of this Subordinated Note, the Company shall have the right to purchase any of the Subordinated Notes at any time in the open market, private transactions or otherwise. If the Company purchases any Subordinated Notes, it may, in its discretion, hold, resell or cancel any of the purchased Subordinated Notes..

 

5.      Events of Default; Acceleration . Each of the following events shall constitute an “ Event of Default ”:

 

(a)     the entry of a decree or order for relief in respect of the Company by a court having jurisdiction in the premises in an involuntary case or proceeding under any applicable bankruptcy, insolvency, or reorganization law, now or hereafter in effect of the United States or any political subdivision thereof, and such decree or order will have continued unstayed and in effect for a period of 60 consecutive days;

 

(b)     the commencement by the Company of a voluntary case under any applicable bankruptcy, insolvency or reorganization law, now or hereafter in effect of the United States or any political subdivision thereof, or the consent by the Company to the entry of a decree or order for relief in an involuntary case or proceeding under any such law;

 

(c)     the Company (i) becomes insolvent or is unable to pay its debts as they mature, (ii) makes an assignment for the benefit of creditors, (iii) admits in writing its inability to pay its debts as they mature, or (iv) ceases to be a bank holding company or financial holding company under the Bank Holding Company Act of 1956, as amended;

 

(d)     the failure of the Company to pay any installment of interest on any of the Subordinated Notes as and when the same will become due and payable, and the continuation of such failure for a period of 15 days;

 

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(e)     the failure of the Company to pay all or any part of the principal of any of the Subordinated Notes as and when the same will become due and payable, and the continuation of such failure for a period of 15 days;

 

(f)     the liquidation of the Company (for the avoidance of doubt, “liquidation” does not include any merger, consolidation, sale of equity or assets or reorganization (exclusive of a reorganization in bankruptcy) of the Company or any of its subsidiaries);

 

(g)     the failure of the Company to perform any other covenant or agreement on the part of the Company contained in the Subordinated Notes, and the continuation of such failure for a period of 30 days after the date on which notice specifying such failure, stating that such notice is a “Notice of Default” hereunder and demanding that the Company remedy the same, will have been given, in the manner set forth in Section 2 2 , to the Company by a Noteholder; or

 

(h)     the default by the Company under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company having an aggregate principal amount outstanding of at least $5,000,000, whether such indebtedness now exists or is created or incurred in the future, which default (i) constitutes a failure to pay any portion of the principal of such indebtedness when due and payable after the expiration of any applicable grace period or (ii) results in such indebtedness becoming due or being declared due and payable prior to the date on which it otherwise would have become due and payable without, in the case of clause (i), such indebtedness having been discharged or, in the case of clause (ii), without such indebtedness having been discharged or such acceleration having been rescinded or annulled.

 

Unless the principal of this Subordinated Note already shall have become due and payable, if an Event of Default described in Section 5(a) or Section 5 (b ) shall have occurred and be continuing, the holder of this Subordinated Note, by notice in writing to Company, may declare the principal amount of this Subordinated Note to be due and payable immediately and, upon any such declaration, the same shall become and shall be immediately due and payable. The Company waives demand, presentment for payment, notice of nonpayment, notice of protest, and all other notices. Notwithstanding the foregoing, because the Company will treat the Subordinated Notes as Tier 2 Capital, upon the occurrence of an Event of Default other than an Event of Default described in Section  5(a) or Section  5 (b) , the Noteholders may not accelerate the Stated Maturity of the Subordinated Notes and make the principal of, and any accrued and unpaid interest on, the Subordinated Notes, immediately due and payable. The Company, within 45 calendar days after the receipt of written notice from any Noteholder of the occurrence of an Event of Default with respect to this Subordinated Note, shall mail to all Noteholders, at their addresses shown on the Security Register (as defined in Section 1 4 below), such written notice of Event of Default, unless such Event of Default shall have been cured or waived before the giving of such notice as certified by the Company in writing to the Noteholder or Noteholders who provided written notice of such Event of Default.

 

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6.      Failure to Make Payments . In the event of any failure by the Company to make any required payment of principal or interest on this Subordinated Note (and in the case of payment of interest, such failure to pay shall have continued for 30 calendar days), the Company will, upon demand of the Noteholder of this Subordinated Note, pay to the Noteholder of this Subordinated Note the amount then due and payable on this Subordinated Note for principal and interest (without acceleration of the Note in any manner), with interest on the overdue principal and interest at the rate borne by this Subordinated Note, to the extent permitted by applicable law. If the Company fails to pay such amount upon such demand, the Noteholder of this Subordinated Note may, among other things, institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company and collect the amounts adjudged or decreed to be payable in the manner provided by law out of the property of the Company.

 

Upon the occurrence of a failure by the Company to make any required payment of principal or interest on this Subordinated Note, or an Event of Default until such Event of Default is cured by the Company or waived by the Noteholders in accordance with Section 17 hereof, the Company shall not, except as required by any federal or state governmental agency: (a) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company’s capital stock; (b) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any indebtedness of the Company that ranks equal with or junior to the Subordinated Notes; or (c) make any payments under any guarantee that ranks equal with or junior to the Subordinated Notes, other than (i) any dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, any class of the Company’s common stock; (ii) any declaration of a non-cash dividend in connection with the implementation of a shareholders’ rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto; (iii) as a result of a reclassification of the Company’s capital stock or the exchange or conversion of one class or series of the Company’s capital stock for another class or series of the Company’s capital stock; (iv) the purchase of fractional interests in shares of the Company’s capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged; or (v) purchases of any class of the Company’s common stock related to the issuance of common stock or rights under any benefit plans for the Company’s directors, officers or employees or any of the Company’s dividend reinvestment plans.

 

7.      Affirmative Covenants of the Company .

 

(a)      Notice of Certain Events . To the extent permitted by applicable statute, rule or regulation, the Company shall provide written notice to the Noteholder of the occurrence of any of the following events as soon as practicable, but in no event later than fifteen (15) Business Days following the Company becoming aware of the occurrence of such event:

 

(i)     The total risk-based capital ratio, Tier 1 risk-based capital ratio, common equity Tier 1 risk-based capital ratio or leverage ratio of the Company (but only to the extent the Company is required to measure and report such ratios on a consolidated basis under applicable law) or any of the Company’s banking subsidiaries becomes less than ten percent (10.0%), eight percent (8.0%), six and one-half percent (6.50%) or five percent (5.0%), respectively;

 

(ii)     The Company, or any officer of the Company, becomes subject to any formal, written regulatory enforcement action (as defined by the applicable regulatory agency);

 

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(iii)     The ratio of non-performing assets to total assets of Patriot Bank, National Association as of the end of a given fiscal quarter, as calculated by the Company in the ordinary course of business and consistent with past practices, becomes greater than four percent (4.0%) or more of total assets as of the end of the immediately following fiscal quarter;

 

(iv)     The appointment, resignation, removal or termination of the chief executive officer, president, chief operating officer, chief financial officer, chief credit officer, chief lending officer or any director of the Company; or

 

(v)     There is a change in ownership of 25% or more of the outstanding securities of the Company entitled to vote for the election of directors.

 

(b)      Payment of Principal and Interest. The Company covenants and agrees for the benefit of the Noteholder of this Subordinated Note that it will duly and punctually pay the principal of, and interest on, this Subordinated Note, in accordance with the terms hereof.

 

(c)      Maintenance of Office . The Company will maintain an office or agency in the city of Stamford, Connecticut where Subordinated Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Subordinated Notes may be served. The Company may also from time to time designate one or more other offices or agencies where the Subordinated Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided that no such designation or rescission will in any manner relieve the Company of its obligation to maintain an office or agency in the city of Stamford, Connecticut. The Company will give prompt written notice to the Noteholders of any such designation or rescission and of any change in the location of any such other office or agency.

 

(d)      Corporate Existence . The Company will do or cause to be done all things necessary to preserve and keep in full force and effect: (i) the corporate existence of the Company; (ii) the existence (corporate or other) of each subsidiary; and (iii) the rights (charter and statutory), licenses and franchises of the Company and each of its subsidiaries; provided, however, that the Company will not be required to preserve the existence (corporate or other) of any of its subsidiaries or any such right, license or franchise of the Company or any of its subsidiaries if the Board of Directors of the Company determines that the preservation thereof is no longer desirable in the conduct of the business of the Company and its subsidiaries taken as a whole and that the loss thereof will not be disadvantageous in any material respect to the Noteholders.

 

(e)      Maintenance of Properties . The Company will, and will cause each subsidiary to, cause all its properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section will prevent the Company or any subsidiary from discontinuing the operation and maintenance of any of their respective properties if such discontinuance is, in the judgment of the Board of Directors of the Company or of any subsidiary, as the case may be desirable in the conduct of its business.

 

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(f)      Waiver of Certain Covenants . The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 7(a ) , Section 7(b) , Section 7(c) , Section 7(d) or Section 7(e) above, with respect to this Subordinated Note if before the time for such compliance the Noteholders of at least a majority in principal amount of the outstanding Subordinated Notes, by act of such Noteholders, either will waive such compliance in such instance or generally will have waived compliance with such term, provision or condition, but no such waiver will extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver will become effective, the obligations of the Company in respect of any such term, provision or condition will remain in full force and effect.

 

(g)      Compliance Certificate . The Company will deliver to the Noteholders, within 120 days after the end of each fiscal year, an Officer’s Certificate covering the preceding calendar year, stating whether or not, to the best of his or her knowledge, the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Subordinated Note (without regard to notice requirements or periods of grace) and if the Company will be in default, specifying all such defaults and the nature and status thereof of which he or she may have knowledge.

 

(h)      Tier 2 Capital . Whether or not the Company is subject to consolidated capital requirements under applicable regulations of the Federal Reserve, if all or any portion of the Subordinated Notes ceases to qualify as Tier 2 Capital, other than due to the limitation imposed on the capital treatment of subordinated debt during the five (5) years immediately preceding the Stated Maturity of the Subordinated Notes, the Company will promptly notify the Noteholder and thereafter, subject to the Company’s right to redeem the Subordinated Notes under such circumstances pursuant to the terms of the Subordinated Notes, if requested by the Company, the Company and the Noteholder will work together in good faith to execute and deliver all agreements as reasonably necessary in order to restructure the applicable portions of the obligations evidenced by the Subordinated Notes to qualify as Tier 2 Capital; provided , however , that nothing contained in this Section 7(h) shall limit the Company’s right to redeem the Subordinated Notes upon the occurrence of a Tier 2 Capital Event pursuant to Section 4(a) or Section 4(b) .

 

(i)      Compliance with Laws . The Company shall comply with the requirements of all laws, regulations, orders and decrees applicable to it or its properties, except for such noncompliance that would not reasonably be expected to have a Material Adverse Effect (as such term is defined in the Purchase Agreement) on the Company and its subsidiaries taken as a whole.

 

(j)      Taxes and Assessments . The Company shall punctually pay and discharge all material taxes, assessments, and other governmental charges or levies imposed upon it or upon its income or upon any of its properties; provided, that no such taxes, assessments or other governmental charges need be paid if they are being contested in good faith by the Company.

 

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(k)      Financial Statements; Access to Records .

 

(i)     Not later than forty-five (45) days following the end of each fiscal quarter for which the Company has not submitted a Consolidated Financial Statements for Holding Companies Reporting Form FR Y-9C to the Federal Reserve, upon request, the Company shall provide the Noteholder with a copy of the Company’s unaudited parent company only balance sheet and statement of income (loss) for and as of the end of such immediately preceding fiscal quarter, prepared in accordance with past practice. Quarterly financial statements, if required herein, shall be unaudited and need not comply with GAAP.

 

(ii)     Not later than ninety (90) days from the end of each fiscal year, upon request the Company shall provide the Noteholder with copies of the Company’s audited financial statements consisting of the consolidated balance sheet of the Company as of the fiscal year end and the related statements of income (loss) and retained earnings, stockholders’ equity and cash flows for the fiscal year then ended. Such financial statements shall be prepared in accordance with GAAP applied on a consistent basis throughout the period involved.

 

8.      Negative Covenants of the Company .

 

(a)      Limitation on Dividends . The Company shall not declare or pay any dividend or make any distribution on capital stock or other equity securities of any kind of the Company if the Company is not “well capitalized” for regulatory capital purposes under Section 225.2(r) of Regulation Y immediately prior to the declaration of such dividend or distribution, except for dividends payable solely in shares of common stock of the Company.

 

(b)      Merger or Sale of Assets . The Company shall not merge into another entity, effect a Change in Bank Control (as defined below), or convey, transfer or lease substantially all of its properties and assets to any person, unless:

 

(i)     the continuing entity into which the Company is merged or the person which acquires by conveyance or transfer or which leases substantially all of the properties and assets of the Company shall be a corporation, association or other legal entity organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and expressly assumes the due and punctual payment of the principal of and any premium and interest on the Subordinated Notes according to their terms, and the due and punctual performance of all covenants and conditions hereof on the part of the Company to be performed or observed; and

 

(ii)     immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing.

 

Change in Bank Control ” means the sale, transfer, lease or conveyance by the Company, or an issuance of stock by the Bank, in either case resulting in ownership by the Company of less than 80% of the Bank.

 

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9.      Global Subordinated Notes .

 

(a)     Provided that applicable depository eligibility requirements are met, upon the written election of any Noteholder that is a Qualified Institutional Buyer, as defined in Rule 144A under the Securities Act, the Company shall use its commercially reasonable efforts to provide that the Subordinated Notes owned by Noteholders that are Qualified Institutional Buyers shall be issued in the form of one or more Global Subordinated Notes (each a “ Global Subordinated Note ”) registered in the name of The Depository Trust Company or another organization registered as a clearing agency under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and designated as Depositary by the Company or any successor thereto (the “ Depositary ”) or a nominee thereof and delivered to such Depositary or a nominee thereof.

 

(b)     Notwithstanding any other provision herein, no Global Subordinated Note may be exchanged in whole or in part for Subordinated Notes registered, and no transfer of a Global Subordinated Note in whole or in part may be registered, in the name of any person other than the Depositary for such Global Subordinated Note or a nominee thereof unless (i) such Depositary advises the Company in writing that such Depositary is no longer willing or able to properly discharge its responsibilities as Depositary with respect to such Global Subordinated Note, and no qualified successor is appointed by the Company within 90 days of receipt by the Company of such notice, (ii) such Depositary ceases to be a clearing agency registered under the Exchange Act and no successor is appointed by the Company within 90 days after obtaining knowledge of such event, (iii) the Company elects to terminate the book-entry system through the Depositary or (iv) an Event of Default shall have occurred and be continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) of this Section 9(b) , the Company or its agent shall notify the Depositary and instruct the Depositary to notify all owners of beneficial interests in such Global Subordinated Note of the occurrence of such event and of the availability of Subordinated Notes to such owners of beneficial interests requesting the same.

 

(c)     If any Global Subordinated Note is to be exchanged for other Subordinated Notes or canceled in part, or if another Subordinated Note is to be exchanged in whole or in part for a beneficial interest in any Global Subordinated Note, then either (i) such Global Subordinated Note shall be so surrendered for exchange or cancellation as provided in this Section 9 or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the principal amount of such other Subordinated Note to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Company or, if applicable, the Company’s registrar and transfer agent (“ Registrar ”), whereupon the Company or, if applicable, the Registrar, in accordance with the applicable rules and procedures of the Depositary (“ Applicable Depositary Procedures ”), shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Subordinated Note by the Depositary, accompanied by registration instructions, the Company shall execute and deliver any Subordinated Notes issuable in exchange for such Global Subordinated Note (or any portion thereof) in accordance with the instructions of the Depositary.

 

(d)     Every Subordinated Note executed and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Subordinated Note or any portion thereof shall be executed and delivered in the form of, and shall be, a Global Subordinated Note, unless such Subordinated Note is registered in the name of a person other than the Depositary for such Global Subordinated Note or a nominee thereof.

 

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(e)     The Depositary or its nominee, as the registered owner of a Global Subordinated Note, shall be the holder of such Global Subordinated Note for all purposes under this Subordinated Note, and owners of beneficial interests in a Global Subordinated Note shall hold such interests pursuant to Applicable Depositary Procedures. Accordingly, any such owner’s beneficial interest in a Global Subordinated Note shall be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Depositary participants. If applicable, the Registrar shall be entitled to deal with the Depositary for all purposes relating to a Global Subordinated Note (including the payment of principal and interest thereon and the giving of instructions or directions by owners of beneficial interests therein and the giving of notices) as the sole holder of the Subordinated Note and shall have no obligations to the owners of beneficial interests therein. The Registrar shall have no liability in respect of any transfers affected by the Depositary.

 

(f)     The rights of owners of beneficial interests in a Global Subordinated Note shall be exercised only through the Depositary and shall be limited to those established by law and agreements between such owners and the Depositary and/or its participants.

 

(g)     No holder of any beneficial interest in any Global Subordinated Note held on its behalf by a Depositary shall have any rights with respect to such Global Subordinated Note, and such Depositary may be treated by the Company and any agent of the Company as the owner of such Global Subordinated Note for all purposes whatsoever. Neither the Company nor any agent of the Company will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Subordinated Note or maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, nothing herein shall prevent the Company or any agent of the Company from giving effect to any written certification, proxy or other authorization furnished by a Depositary or impair, as between a Depositary and such holders of beneficial interests, the operation of customary practices governing the exercise of the rights of the Depositary (or its nominee) as holder of any Subordinated Note.

 

(h)     Company, within 30 calendar days after the receipt of written notice from the Noteholder or any other holder of the Subordinated Notes of the occurrence of an Event of Default with respect to this Subordinated Note, shall mail to all the Noteholders, at their addresses shown on the Security Register (as defined in Section 1 4 below), such written notice of Event of Default, unless such Event of Default shall have been cured or waived before the giving of such notice as certified by Company in writing.

 

10.      Denominations . The Subordinated Notes are issuable only in registered form without interest coupons in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof.

 

11.      Charges and Transfer Taxes . No service charge will be made for any registration of transfer or exchange of this Subordinated Note, or any redemption or repayment of this Subordinated Note, or any conversion or exchange of this Subordinated Note for other types of securities or property, but the Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges that may be imposed in connection with the transfer or exchange of this Subordinated Note from the Noteholder requesting such transfer or exchange.

 

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12.      Payment Procedures . Payment of the principal and interest payable on the Stated Maturity will be made by check, by wire transfer or by Automated Clearing House (ACH) transfer in immediately available funds to a bank account in the United States designated by the Noteholder of this Subordinated Note if such Noteholder shall have previously provided wire instructions to the Company, upon presentation and surrender of this Subordinated Note at the Payment Office (as defined in Section 2 2 below) or at such other place or places as the Company shall designate by notice to the Noteholders as the Payment Office, provided that this Subordinated Note is presented to the Company in time for the Company to make such payments in such funds in accordance with its normal procedures. Payments of interest (other than interest payable on the Stated Maturity) shall be made by wire transfer in immediately available funds or check mailed to the registered Noteholder of this Subordinated Note, as such person’s address appears on the Security Register (as defined below). Interest payable on any Interest Payment Date shall be payable to the Noteholder in whose name this Subordinated Note is registered at the close of business on the fifteenth calendar day prior to the applicable Interest Payment Date, without regard to whether such date is a Business Day, except that interest not paid on the Interest Payment Date, if any, will be paid to the Noteholder in whose name this Subordinated Note is registered at the close of business on a special record date fixed by the Company (a “ Special Record Date ”), notice of which shall be given to the Noteholder of this Subordinated Note not less than 10 calendar days prior to such Special Record Date. To the extent permitted by applicable law, interest shall accrue, at the rate at which interest accrues on the principal of this Subordinated Note, on any amount of principal or interest on this Subordinated Note not paid when due. All payments on this Subordinated Note shall be applied first against interest due hereunder; and then against principal due hereunder. The Noteholder of this Subordinated Note acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of this Subordinated Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Subordinated Notes. In the event that the Noteholder of this Subordinated Note receives payments in excess of its pro rata share of the Company’s payments to the Noteholders of all of the Subordinated Notes, then the Noteholder of this Subordinated Note shall hold in trust all such excess payments for the benefit of the Noteholders of the other Subordinated Notes and shall pay such amounts held in trust to such other Noteholders upon demand by such Noteholders.

 

13.      Form of Payment . Payments of principal and interest on this Subordinated Note shall be made in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts.

 

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14.      Registration of Transfer, Security Register . Except as otherwise provided herein, this Subordinated Note is transferable in whole or in part, and may be exchanged for a like aggregate principal amount of Subordinated Notes of other authorized denominations, by the Noteholder of this Subordinated Note in person, or by its attorney duly authorized in writing, at the Payment Office. The Company shall maintain a register providing for the registration of the Subordinated Notes and any exchange or transfer thereof (the “ Security Register ”). Upon surrender or presentation of this Subordinated Note for exchange or registration of transfer, the Company shall execute and deliver in exchange therefor a Subordinated Note or Subordinated Notes of like aggregate principal amount, each in a minimum denomination of $1,000 or any amount in excess thereof which is an integral multiple of $1,000 (and, in the absence of an opinion of counsel satisfactory to the Company to the contrary, bearing the restrictive legend(s) set forth hereinabove) and that is or are registered in such name or names requested by the Noteholder. Any Subordinated Note presented or surrendered for registration of transfer or for exchange shall be duly endorsed and accompanied by a written instrument of transfer in such form as is attached hereto and incorporated herein, duly executed by the Noteholder of this Subordinated Note or its attorney duly authorized in writing, with such tax identification number or other information for each person in whose name a Subordinated Note is to be issued, and accompanied by evidence of compliance with any restrictive legend(s) appearing on such Subordinated Note or Subordinated Notes as the Company may reasonably request to comply with applicable law. No exchange or registration of transfer of this Subordinated Note shall be made on or after (i) the fifteenth (15 th ) day immediately preceding the Stated Maturity or (ii) the due delivery of notice of redemption.

 

15.      Priority . The Subordinated Notes rank pari passu among themselves and pari passu , in the event of any insolvency proceeding, dissolution, assignment for the benefit of creditors, reorganization, restructuring of debt, marshaling of assets and liabilities or similar proceeding or any liquidation or winding up of the Company, with all other present or future unsecured subordinated debt obligations of the Company, except any unsecured subordinated debt that, pursuant to its express terms, is senior or subordinate in right of payment to the Subordinated Notes and all Senior Indebtedness.

 

16.      Ownership . Prior to due presentment of this Subordinated Note for registration of transfer, the Company may treat the Noteholder in whose name this Subordinated Note is registered in the Security Register as the absolute owner of this Subordinated Note for receiving payments of principal and interest on this Subordinated Note and for all other purposes whatsoever, whether or not this Subordinated Note be overdue, and the Company shall not be affected by any notice to the contrary.

 

17.      Waiver and Consent .

 

(a)     Any consent or waiver given by the Noteholder of this Subordinated Note shall be conclusive and binding upon such Noteholder and upon all future Noteholders of this Subordinated Note and of any Subordinated Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Subordinated Note. This Subordinated Note may also be amended or waived pursuant to, and in accordance with, the provisions of Section 7.3 of the Purchase Agreement. No delay or omission of the holder of this Subordinated Note to exercise any right or remedy accruing upon any Event of Default shall impair such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Any insured depository institution which shall be a holder of this Subordinated Note or which otherwise shall have any beneficial ownership interest in this Subordinated Note shall, by its acceptance of such Subordinated Note (or beneficial interest therein), be deemed to have waived any right of offset with respect to the repayment of the indebtedness evidenced thereby.

 

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(b)     No waiver or amendment of any term, provision, condition, covenant or agreement in the Subordinated Notes shall be effective except with the consent of the Noteholders holding not less than more than fifty percent (50%) in aggregate principal amount (excluding any Subordinated Notes held by the Company or any of its Affiliates) of the Subordinated Notes at the time outstanding; provided , however , that without the consent of each Noteholder of an affected Subordinated Note, no such amendment or waiver may: (i) reduce the principal amount of any Subordinated Note; (ii) reduce the rate of or change the time for payment of interest on any Subordinated Note; (iii) extend the maturity of any Subordinated Note; (iv) change the currency in which payment of the obligations of the Company under the Subordinated Notes are to be made; (v) lower the percentage of aggregate principal amount of outstanding Subordinated Notes required to approve any amendment of the Subordinated Notes; (vi) make any changes to Section 5 (Events of Default: Acceleration); Section 6 (Failure to Make Payments); Section 7 (Affirmative Covenants of the Company); or Section 8 (Negative Covenants of the Company) of the Subordinated Notes that adversely affects the rights of any Noteholder; or (vii) disproportionately affect any of the Noteholders of the then outstanding Subordinated Notes. Notwithstanding the foregoing, the Company may amend or supplement the Subordinated Notes without the consent of the Noteholders to cure any ambiguity, defect or inconsistency or to provide for uncertificated Subordinated Notes in addition to or in place of certificated Subordinated Notes, or to make any change that does not adversely affect the rights of any Noteholder of any of the Subordinated Notes. No failure to exercise or delay in exercising, by any Noteholder of the Subordinated Notes, of any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right or remedy provided by law, except as restricted hereby. The rights and remedies provided in this Subordinated Note are cumulative and not exclusive of any right or remedy provided by law or equity. No notice or demand on the Company in any case shall, in itself, entitle the Company to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Noteholders to any other or further action in any circumstances without notice or demand. No consent or waiver, expressed or implied, by the Noteholders to or of any breach or default by the Company in the performance of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of the same or any other obligations of the Company hereunder. Failure on the part of the Noteholders to complain of any acts or failure to act or to declare an Event of Default, irrespective of how long such failure continues, shall not constitute a waiver by the Noteholders of their rights hereunder or impair any rights, powers or remedies on account of any breach or default by the Company.

 

18.      Absolute and Unconditional Obligation of the Company . No provisions of this Subordinated Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal and interest on this Subordinated Note at the times, places and rate, and in the coin or currency, herein prescribed.

 

19.      Successors and Assigns . This Subordinated Note shall be binding upon the Company and inure to the benefit of the Noteholder and its respective successors and permitted assigns. The Noteholder may assign all, or any part of, or any interest in, the Noteholder’s rights and benefits hereunder. To the extent of any such assignment, such assignee shall have the same rights and benefits against the Company and shall agree to be bound by and to comply with the terms and conditions of the Purchase Agreement as it would have had if it were the Noteholder hereunder.

 

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20.      No Sinking Fund; Convertibility . This Subordinated Note is not entitled to the benefit of any sinking fund. This Subordinated Note is not convertible into or exchangeable for any of the equity securities, other securities or assets of the Company or any subsidiary.

 

21.      No Recourse Against Others . No recourse under or upon any obligation, covenant or agreement contained in this Subordinated Note, or for any claim based thereon or otherwise in respect thereof, will be had against any past, present or future shareholder, employee, officer, or director, as such, of the Company or of any predecessor or successor, either directly or through the Company or any predecessor or successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of this Subordinated Note by the holder of this Subordinated Note and as part of the consideration for the issuance of this Subordinated Note.

 

22.      Notices . All notices to the Company under this Subordinated Note shall be in writing and addressed to the Company at 900 Bedford Street, Stamford, Connecticut 06901, Attention: Joseph D. Perillo, or to such other address as the Company may provide to the Noteholders (the “ Payment Office ”). All notices to the Noteholders shall be in writing and sent by first-class mail to each Noteholder at such Noteholder’s address as set forth in the Security Register.

 

23.      Further Issues . The Company may, without the consent of the Noteholders of the Subordinated Notes, create and issue additional notes having the same terms and conditions of the Subordinated Notes (except for the Issue Date) so that such further notes shall be consolidated and form a single series with the Subordinated Notes.

 

24.      Governing Law; Interpretation . THIS SUBORDINATED NOTE WILL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. THIS SUBORDINATED NOTE IS INTENDED TO MEET THE CRITERIA FOR QUALIFICATION OF THE OUTSTANDING PRINCIPAL AS TIER 2 CAPITAL UNDER THE REGULATORY GUIDELINES OF THE FEDERAL RESERVE, AND THE TERMS HEREOF SHALL BE INTERPRETED IN A MANNER TO SATISFY SUCH INTENT.

 

[Signature Page Follows ]

 

A-19

 

 

IN WITNESS WHEREOF, the undersigned has caused this Subordinated Note to be duly executed and attested.

 

 

PATRIOT NATIONAL BANCORP, INC.

       
 

By:

 
   

Name:

 Joseph D. Perillo

   

Title:

Executive Vice President and Chief Financial Officer

 

 

ATTEST:  
   
   
   
Name: Frederick K. Staudmyer  
Title: Executive Vice President and Corporate Secretary  

 

 

[Signature Page to Subordinated Note]

 

 

 

 

ASSIGNMENT FORM

 

To assign this Subordinated Note, fill in the form below: (I) or (we) assign and transfer this Subordinated Note to:

 


(Print or type assignee’s name, address and zip code)

 


(Insert assignee’s social security or tax I.D. No.)

 

and irrevocably appoint _______________________ agent to transfer this Subordinated Note on the books of the Company. The agent may substitute another to act for him.

 

Date:     Your signature:    
      (Sign exactly as your name appears on the face of this Subordinated Note)
           
      Tax Identification No:  

 

Signature Guarantee:  

(Signatures must be guaranteed by an eligible guarantor institution (banks, stockbrokers , savings and loan associations and credit unions with membership in an approved signature guarantee medallion progr am), pursuant to Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)).

 

The undersigned certifies that it [is / is not] an Affiliate of the Company and that, to its knowledge, the proposed transferee [is / is not] an Affiliate of the Company.

 

In connection with any transfer or exchange of this Subordinated Note occurring prior to the date that is one year after the later of the date of original issuance of this Subordinated Note and the last date, if any, on which this Subordinated Note was owned by the Company or any Affiliate of the Company, the undersigned confirms that this Subordinated Note is being:

CHECK ONE BOX BELOW:

 

(1) acquired for the undersigned’s own account, without transfer;
     
(2) transferred to the Company;
     
(3) transferred in accordance and in compliance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”);
     
(4) transferred under an effective registration statement under the Securities Act;
     
(5) transferred in accordance with and in compliance with Regulation S under the Securities Act;

 

 

 

 

(6) transferred to an institutional “accredited investor” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act);
     
(7) transferred to an “accredited investor” (as defined in Rule 501(a)(4) under the Securities Act), not referred to in item (6) that has been provided with the information designated under Section 4(d) of the Securities Act of 1933; or
     
(7) transferred in accordance with another available exemption from the registration requirements of the Securities Act.

 

Unless one of the boxes is checked, the Company will refuse to register this Subordinated Note in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6), (7) or (8) is checked, the Company may require, prior to registering any such transfer of this Subordinated Note, in its sole discretion, such legal opinions, certifications and other information as the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act such as the exemption provided by Rule 144 under such Act.

 

    Signature:  
       
Signature Guarantee:      

 

(Signatures must be guaranteed by an eligible guarantor institution (banks, stockbroker s, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program), pursuant to Exchange Act Rule 17Ad-l5).

 

TO BE COMPLETED BY PURCHASER IF BOX (1) OR (3) ABOVE IS CHECKED.

 

The undersigned represents and warrants that it is purchasing this Subordinated Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned’s foregoing representations in order to claim the exemption from registration provided by Rule 144A.

 

Date:     Signature:  

 

Exhibit 10.(5)

 

FIRST AMENDMENT

 

TO     

ASSET PURCHASE AGREEMENT

 


 

This First Amendment, dated as of August 2, 2018 (“ First Amendment ”), amends a certain Asset Purchase Agreement (the “ Agreement ”), dated as of February 2, 2018, which was executed by and between Hana Small Business Lending, Inc., a Delaware corporation (“ Hana ”), Hana ABS 2014-1, LLC, a Delaware limited liability company and wholly-owned subsidiary of Hana, Hana ABS 2016-1, LLC, a Delaware limited liability company and wholly-owned subsidiary of Hana, and Hana Investment, LLC (“ Hana Investment ”), a Delaware limited liability company and wholly-owned subsidiary of Hana, and Patriot Bank, N.A., a national banking association (the “ Purchaser ”).

 

Background Recitals

 

 

A.

The Parties are actively and diligently pursuing the acquisition contemplated by the Agreement but require additional time to obtain the necessary approvals.

 

 

B.

The Parties wish to amend the Agreement to extend the Closing Date and Termination Date in accordance with Section 8.4 of the Agreement. The Parties also desire to confirm the agreed upon amount of the Purchase Price adjustment under Section 1.7 of the Agreement and satisfaction of the condition in Section 5.1(e) of the Agreement

 

 

C.

The capitalized terms used in this First Amendment and not otherwise defined have the respective meanings given to them in the Agreement.

 

NOW THEREFORE, in consideration of the mutual agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows:

 

 

1.

Termination Date . The definition of “ Termination Date ” in Section 9.1 of the Agreement is hereby replaced with the following definition:

 

Termination Date ” means the earlier of (a) August 1, 2019, unless extended by the Parties by mutual agreement in writing, and (b) the date Purchaser receives written notice from the SBA of the rejection of its application for approval as an SBA lender and proposed servicer of the Transferred Assets.

 

 

2.

Closing Date . The phrase “on or before the six (6) month anniversary of the Effective Date” in Section 1.10 of the Agreement is deleted and replaced with the following: “on or before August 1, 2019.”

 

 

3.

Purchase Price Adjustment . Pursuant to Section 1.7 of the Agreement, the Parties have agreed upon the Purchase Price adjustment, which is described on Schedule 1 attached to and made a part of this First Amendment. Therefore, the condition in Section 5.1(e) of the Agreement has been satisfied.

 

 

 

 

 

4.

Estoppel . Seller certifies to Purchaser that to Seller’s knowledge (as defined in Section 2.13 of the Agreement), as of the date of this First Amendment, Purchaser is not in breach or default under the Agreement, and no event or condition has occurred, which if not cured after notice or passage of time, or both, will be a default or breach of the Agreement by Purchaser. Purchaser certifies to Seller that to Purchaser’s knowledge, Seller is not in breach or default under the Agreement, and no event or condition has occurred, which if not cured after notice or passage of time, or both, will be a default or breach of the Agreement by Seller.

 

 

5.

Miscellaneous .

 

(a) Execution . This First Amendment may be executed in multiple counterparts each of which shall be deemed an original and all of which shall constitute one instrument. If any signature is delivered by facsimile transmission or by e-mail delivery of a “pdf” format data file, the signature will create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if the facsimile or “pdf” signature page were an original.

 

(b) Headings . The headings of the several Sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this First Amendment.

 

(c) Interpretation . This First Amendment shall not be construed against the drafter.

 

 

6.

Agreement Remains in Effect . The remainder of the Agreement remains in full force and effect unchanged by this First Amendment.

 

 

 

 

IN WITNESS WHEREOF, the Parties hereto have entered into this First Amendment to Asset Purchase Agreement as of the date and year first above written.

 

 

SELLER :

 

HANA SMALL BUSINESS LENDING, INC.

 

 

By:
                                                                               
Name: Young A. Shim
Title: Chairman of the Board

 

 

HANA ABS 2014-1, LLC

 

 

By:                                                  
Name:                                          
Title:                                             

 

 

HANA ABS 2016-1, LLC

 

 

By:                                                  
Name:                                          
Title:                                             

 

 

HANA INVESTMENT, LLC

 

 

By:                                                   
Name:                                           
Title:                                              

 

 

PURCHASER :

 

PATRIOT BANK, N.A.

 

 

By:                                                          
Name:                                                     
Title:                                                        

 

 

Exhibit 10(6)

 

SUBORDINATED NOTE PURCHASE AGREEMENT

 

This SUBORDINATED NOTE PURCHASE AGREEMENT (this “ Agreement ”) is dated as of June 29, 2018, and is made by and among Patriot National Bancorp, Inc., a Connecticut corporation (the “ Company ”), and the several purchasers of the Subordinated Notes (as defined herein) identified on the signature pages hereto (each a “ Purchaser ” and collectively, the “ Purchasers ”).

 

RECITALS

 

WHEREAS , the Company has requested that the Purchasers purchase from the Company up to $10,000,000 in aggregate principal amount of Subordinated Notes, which Aggregate Offering Amount is intended to qualify as Tier 2 Capital (as defined herein).

 

WHEREAS , the Company has engaged Sandler O’Neill + Partners, L.P. as its Lead Placement Agent and Brean Capital, LLC as its Co-Placement Agent (each, a “ Placement Agent ” and, collectively, the “ Placement Agents ”) for the offering of the Subordinated Notes.

 

WHEREAS , each of the Purchasers is an institutional “accredited investor” as such term is defined in Rule 501 of Regulation D (“ Regulation D ”) promulgated under the Securities Act of 1933, as amended (the “ Securities Act ”).

 

WHEREAS , the offer and sale of the Subordinated Notes by the Company is being made in reliance upon the exemptions from registration available under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D.

 

WHEREAS , each Purchaser is willing to purchase from the Company a Subordinated Note in the aggregate principal amount set forth on such Purchaser’s respective signature page hereto (the “ Subordinated Note Amount ”) in accordance with the terms, subject to the conditions and in reliance on, the recitals, representations, warranties, covenants and agreements set forth herein and in the Subordinated Notes.

 

NOW, THEREFORE , in consideration of the mutual covenants, conditions and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows:

 

AGREEMENT

 

1.

DEFINITIONS .

 

1.1      Defined Terms . The following capitalized terms generally used in this Agreement and in the Subordinated Notes have the meanings defined or referenced below. Certain other capitalized terms used only in specific sections of this Agreement may be defined in such sections.

 

Affiliate(s) ” means, with respect to any Person, such Person’s immediate family members, partners, members or parent and subsidiary corporations, and any other Person directly or indirectly controlling, controlled by, or under common control with said Person and their respective Affiliates.

 

 

 

 

Agreement ” has the meaning set forth in the preamble hereto.

 

Bank ” means Patriot Bank, National Association, a national banking association and wholly owned subsidiary of the Company.

 

Business Day ” means any day other than a Saturday, Sunday or any other day on which banking institutions in the State of Connecticut are permitted or required by any applicable law or executive order to close.

 

Bylaws ” has the meaning set forth in Section 3.2.1.2(c) .

 

Charter ” has the meaning set forth in Section 3.2.1.2(a) .

 

Closing ” has the meaning set forth in Section 2.5 .

 

Closing Date ” means June 29, 2018.

 

Company ” has the meaning set forth in the preamble hereto and shall include any successors to the Company.

 

Company Covered Person ” has the meaning set forth in Section 4.2.4 .

 

Company s SEC Reports ” means (i) Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the SEC, (ii) Company’s Definitive Proxy Statement on Schedule 14A related to its 2018 Annual Meeting of Shareholders, as filed with the SEC, (iii) any Current Report on Form 8-K, as filed or furnished by Company with the SEC since January 1, 2018, or (iv) Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended on March 31, 2018, as filed with the SEC pursuant to the requirements of the Exchange Act.

 

Disbursements ” has the meaning set forth in Section 3.1 .

 

Disqualification Event ” has the meaning set forth in Section 4.2.4 .

 

DTC ” has the meaning set forth in Section 5.8 .

 

Equity Interest ” means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person which is not a corporation, and any and all warrants, options or other rights to purchase any of the foregoing.

 

Event of Default ” has the meaning set forth in the Subordinated Notes.

 

Exchange Act ” means the Securities Exchange Act of 1934, as amended.

 

FDIC ” means the Federal Deposit Insurance Corporation.

 

2

 

 

FRB ” means the Board of Governors of the Federal Reserve System.

 

GAAP ” means generally accepted accounting principles in effect from time to time in the United States of America.

 

Governmental Agency(ies) ” means, individually or collectively, any federal, state, county or local governmental department, commission, board, regulatory authority or agency (including each applicable Regulatory Agency) with jurisdiction over the Company or a Subsidiary of the Company.

 

Governmental Licenses ” has the meaning set forth in Section 4.3 .

 

Hazardous Materials ” means flammable explosives, asbestos, urea formaldehyde insulation, polychlorinated biphenyls, radioactive materials, hazardous wastes, toxic or contaminated substances or similar materials, including any substances which are “hazardous substances,” “hazardous wastes,” “hazardous materials” or “toxic substances” under the Hazardous Materials Laws and/or other applicable environmental laws, ordinances or regulations.

 

Hazardous Materials Laws ” mean any laws, regulations, permits, licenses or requirements pertaining to the protection, preservation, conservation or regulation of the environment which relates to real property, including: the Clean Air Act, as amended, 42 U.S.C. Section 7401 et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251 et seq.; the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 et seq.; the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (including the Superfund Amendments and Reauthorization Act of 1986), 42 U.S.C. Section 9601 et seq.; the Toxic Substances Control Act, as amended, 15 U.S.C. Section 2601 et seq.; the Occupational Safety and Health Act, as amended, 29 U.S.C. Section 651, the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Section 11001 et seq.; the Mine Safety and Health Act of 1977, as amended, 30 U.S.C. Section 801 et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; and all comparable state and local laws, laws of other jurisdictions or orders and regulations.

 

Indebtedness ” means: (i) all items arising from the borrowing of money that, according to GAAP as in effect from time to time, would be included in determining total liabilities as shown on the consolidated balance sheet of the Company; and (ii) all obligations secured by any lien in property owned by the Company or the Subsidiary whether or not such obligations shall have been assumed; provided, however , Indebtedness shall not include deposits or other Indebtedness created, incurred or maintained in the ordinary course of the Company’s or the Bank’s business (including federal funds purchased, advances from any Federal Home Loan Bank, secured deposits of municipalities, letters of credit issued by the Company or the Bank and repurchase arrangements) and consistent with customary banking practices and applicable laws and regulations.

 

Leases ” means all leases, licenses or other documents providing for the use or occupancy of any portion of any Property, including all amendments, extensions, renewals, supplements, modifications, sublets and assignments thereof and all separate letters or separate agreements relating thereto.

 

3

 

 

Material Adverse Effect ” means, with respect to any Person, any change or effect that (i) is or would be reasonably likely to be material and adverse to the financial condition, results of operations or business of such Person, or (ii) would materially impair the ability of such Person to perform its respective obligations under any of the Transaction Documents, or otherwise materially impede the consummation of the transactions contemplated hereby; provided, however , that “Material Adverse Effect” shall not be deemed to include the impact of (1) changes in banking and similar laws, rules or regulations of general applicability or interpretations thereof by Governmental Agencies, (2) changes in GAAP or regulatory accounting requirements applicable to financial institutions and their holding companies generally, (3) changes after the date of this Agreement in general economic (including the impact of tariffs or other trade restrictions) or capital market conditions affecting financial institutions or their market prices generally and not specifically related to the Company, the Bank or the Purchasers, (4) direct effects of compliance with this Agreement on the operating performance of the Company, the Bank or the Purchasers, including expenses incurred by the Company, the Bank or the Purchasers in consummating the transactions contemplated by this Agreement, and (5) the effects of any action or omission taken by the Company with the prior written consent of the Purchasers, and vice versa, or as otherwise contemplated by this Agreement and the Subordinated Notes.

 

Maturity Date ” means June 30, 2028.

 

Person ” means an individual, a corporation (whether or not for profit), a partnership, a limited liability company, a joint venture, an association, a trust, an unincorporated organization, a government or any department or agency thereof (including a Governmental Agency) or any other entity or organization.

 

Placement Agent ” or “ Placement Agents ” has the meaning set forth in the Recitals.

 

Property ” means any real property owned or leased by the Company or any Affiliate or Subsidiary of the Company.

 

Purchaser ” or “ Purchasers ” has the meaning set forth in the preamble hereto.

 

QIB ” has the meaning set forth in Section 5.8 .

 

Regulation D ” has the meaning set forth in the Recitals.

 

Regulatory Agency ” means any federal or state agency charged with the supervision or regulation of depository institutions or holding companies of depository institutions, or engaged in the insurance of depository institution deposits, or any court, administrative agency or commission or other authority, body or agency having supervisory or regulatory authority with respect to the Company or the Bank.

 

SEC ” means the Securities and Exchange Commission.

 

4

 

 

Secondary Market Transaction ” has the meaning set forth in Section 5.5 .

 

Securities Act ” has the meaning set forth in the Recitals.

 

Subordinated Note ” means the Subordinated Note (or collectively, the “ Subordinated Notes ”) in the form attached as Exhibit A hereto, as amended, restated, supplemented or modified from time to time, and each Subordinated Note delivered in substitution or exchange for such Subordinated Note.

 

Subordinated Note Amount ” has the meaning set forth in the Recitals.

 

Subsidiary ” means those “significant subsidiaries,” as defined in Rule 1-02(w) of Regulation S-X, of the Company that would be required to be identified on Exhibit 21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

Tier 2 Capital ” has the meaning given to the term “Tier 2 capital” in 12 C.F.R. Part 217, as amended, modified and supplemented and in effect from time to time or any replacement thereof.

 

Transaction Documents ” has the meaning set forth in Section 3.2.1.1 .

 

1.2      Interpretations . The foregoing definitions are equally applicable to both the singular and plural forms of the terms defined. The words “hereof”, “herein” and “hereunder” and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The word “including” when used in this Agreement without the phrase “without limitation,” shall mean “including, without limitation.” All references to time of day herein are references to Eastern Time unless otherwise specifically provided. All references to this Agreement and the Subordinated Notes shall be deemed to be to such documents as amended, modified or restated from time to time. With respect to any reference in this Agreement to any defined term, (i) if such defined term refers to a Person, then it shall also mean all heirs, legal representatives and permitted successors and assigns of such Person, and (ii) if such defined term refers to a document, instrument or agreement, then it shall also include any amendment, replacement, extension or other modification thereof.

 

1.3      Exhibits Incorporated . All Exhibits attached are hereby incorporated into this Agreement.

 

2.

SUBORDINATED DEBT .

 

2.1      Certain Terms . Subject to the terms and conditions herein contained, the Company proposes to issue and sell to the Purchasers, severally and not jointly, Subordinated Notes in an aggregate principal amount equal to the aggregate of the Subordinated Note Amounts. The Purchasers, severally and not jointly, each agree to purchase the Subordinated Notes from the Company on the Closing Date in accordance with the terms of, and subject to the conditions and provisions set forth in, this Agreement and the Subordinated Notes. The Subordinated Note Amounts shall be disbursed in accordance with Section 3.1 . The Subordinated Notes shall bear interest per annum as set forth in the Subordinated Notes. The unpaid principal balance of the Subordinated Notes plus all accrued but unpaid interest thereon shall be due and payable on the Maturity Date, or such earlier date on which such amount shall become due and payable on account of (i) acceleration by the Purchasers in accordance with the terms of the Subordinated Notes and this Agreement or (ii) the Company’s delivery of a notice of redemption or repayment in accordance with the terms of the Subordinated Notes.

 

5

 

 

2.2      Subordination . The Subordinated Notes shall be subordinated in accordance with the subordination provisions set forth therein.

 

2.3      Maturity Date . On the Maturity Date, all sums due and owing under this Agreement and the Subordinated Notes shall be repaid in full. The Company acknowledges and agrees that the Purchasers have not made any commitments, either express or implied, to extend the terms of the Subordinated Notes past their Maturity Date, and shall not extend such terms beyond the Maturity Date unless the Company and the Purchasers hereafter specifically otherwise agree in writing.

 

2.4      Unsecured Obligations . The obligations of the Company to the Purchasers under the Subordinated Notes shall be unsecured.

 

2.5      The Closing . The closing of the sale and purchase of the Subordinated Notes (the “ Closing ”) shall occur at the offices of the Company at 3:00 p.m. (local time) on the Closing Date, as the case may be, or at such other place or time or on such other date as the parties hereto may agree.

 

2.6      Payments . The Company agrees that matters concerning payments and application of payments shall be as set forth in this Agreement and in the Subordinated Notes.

 

2.7      Right of Offset . Each Purchaser hereby expressly waives any right of offset it may have against the Company or its Subsidiary.

 

2.8      Use of Proceeds . The Company shall use the net proceeds from the sale of Subordinated Notes for general corporate purposes, which includes capital to finance and support acquisitions, and for investment in the Bank as regulatory capital.

 

3.

DISBURSEMENT .

 

3.1      Disbursement . On the Closing Date, assuming all of the terms and conditions set forth in Section 3.2 have been satisfied by the Company and the Company has executed and delivered to each of the Purchasers this Agreement and such Purchaser’s Subordinated Note and any other related documents in form and substance reasonably satisfactory to the Purchasers, each Purchaser shall disburse in immediately available funds the Subordinated Note Amount set forth on each Purchaser’s respective signature page hereto to the Company in exchange for a Subordinated Note with a principal amount equal to such Subordinated Note Amount (the “ Disbursement ”). The Company will deliver to the respective Purchaser one or more certificates representing the Subordinated Notes in definitive form (or provide evidence of the same with the original to be delivered by the Company by overnight delivery on the next calendar day in accordance with the delivery instructions of the Purchaser), registered in such names and denominations as such Purchasers may request.

 

6

 

 

3.2      Conditions Precedent to the Disbursement .

 

3.2.1      Conditions to the Purchasers Obligation . The obligation of each Purchaser to consummate the purchase of the Subordinated Notes to be purchased by them at the Closing and to effect the Disbursement is subject to delivery by or at the direction of the Company to such Purchaser each of the following (or written waiver by such Purchaser prior to the Closing of such delivery):

 

3.2.1.1      Transaction Documents . This Agreement and the Subordinated Notes (collectively, the “ Transaction Documents ”), each duly authorized and executed by the Company.

 

3.2.1.2      Authority Documents .

 

(a)     A copy, certified by the Secretary or Assistant Secretary of the Company, of the Articles of Incorporation of the Company, as amended (the “ Charter ”);

 

(b)     A certificate of existence of the Company issued by the Secretary of State of the State of Connecticut;

 

(c)     A copy, certified by the Secretary or Assistant Secretary, of the Amended and Restated Bylaws of the Company (the “ Bylaws ”);

 

(d)     A copy, certified by the Secretary or Assistant Secretary of the Company, of the written consent of the board of directors of the Company authorizing the execution, delivery and performance of the Transaction Documents;

 

(e)     An incumbency certificate of the Secretary or Assistant Secretary of the Company certifying the names of the officer or officers of the Company authorized to sign the Transaction Documents and the other documents provided for in this Agreement; and

 

(f)     The opinion of Holland & Knight LLP, counsel to the Company, dated as of the Closing Date, substantially in the form set forth at Exhibit B attached hereto addressed to the Purchasers and the Placement Agents.

 

3.2.1.3      Other Documents . Such other certificates, affidavits, schedules, resolutions, notes and/or other documents which are provided for hereunder or as a Purchaser may reasonably request.

 

3.2.1.4      Aggregate Investments . Prior to, or contemporaneously with the Closing, each Purchaser shall have actually subscribed for the Subordinated Note Amount set forth on such Purchaser’s signature page.

 

3.2.2      Conditions to the Company s Obligation .

 

3.2.2.1      With respect to a given Purchaser, the obligation of the Company to consummate the sale of the Subordinated Notes and to effect the Closing is subject to delivery by or at the direction of such Purchaser to the Company of this Agreement, duly authorized and executed by such Purchaser.

 

7

 

 

4.

REPRESENTATIONS AND WARRANTIES OF COMPANY .

 

The Company hereby represents and warrants to each Purchaser as follows:

 

4.1      Organization and Authority .

 

4.1.1      Organization Matters of the Company and Its Subsidiary .

 

4.1.1.1      The Company is duly organized, validly existing and in good standing under the laws of the State of Connecticut and has all requisite corporate power and authority to conduct its business and activities as presently conducted, to own its properties, and to perform its obligations under the Transaction Documents. The Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect on the Company. The Company is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended.

 

4.1.1.2      The Bank is the only direct or indirect Subsidiary of the Company. The Bank has been duly chartered and is validly existing as a national banking association, in each case in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not reasonably be expected to result in a Material Adverse Effect on the Company. All of the issued and outstanding shares of capital stock or other Equity Interests in the Subsidiary of the Company have been duly authorized and validly issued, are fully paid and non-assessable and are owned by the Company directly free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim; none of the outstanding shares of capital stock of, or other Equity Interests in, the Subsidiary of the Company were issued in violation of the preemptive or similar rights of any security holder of such Subsidiary of the Company or any other entity.

 

4.1.1.3      The Bank is a national banking association. The deposit accounts of the Bank are insured by the FDIC up to applicable limits The Bank has not received any notice or other information indicating that the Bank is not an “insured depository institution” as defined in 12 U.S.C. Section 1813, nor has any event occurred which could reasonably be expected to adversely affect the status of the Bank as an FDIC-insured institution.

 

4.1.2      Capital Stock and Related Matters . The Charter of the Company authorizes the Company to issue 100,000,000 shares of common stock and no shares of preferred stock. As of the date of this Agreement, there are 3,978,319 shares of the Company’s common stock issued and 3,904,578 shares of the Company’s common stock outstanding and no shares of the Company’s preferred stock issued and outstanding. All of the outstanding capital stock of the Company has been duly authorized and validly issued and is fully paid and non-assessable. There are, as of the date hereof, no outstanding options, rights, warrants or other agreements or instruments obligating the Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of the capital stock of the Company or obligating the Company to grant, extend or enter into any such agreement or commitment to any Person other than the Company except pursuant to the Company’s equity incentive plans duly adopted by the Company’s Board of Directors.

 

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4.2      No Impediment to Transactions .

 

4.2.1      Transaction is Legal and Authorized . The issuance of the Subordinated Notes, the borrowing of the aggregate of the Subordinated Note Amount the execution of the Transaction Documents and compliance by the Company with all of the provisions of the Transaction Documents are within the corporate and other powers of the Company.

 

4.2.2      Agreement . This Agreement has been duly authorized, executed and delivered by the Company, and, assuming due authorization, execution and delivery by the other parties hereto, constitutes the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors’ rights generally or by general equitable principles.

 

4.2.3      Subordinated Notes . The Subordinated Notes have been duly authorized by the Company and when executed by the Company and issued, delivered to and paid for by the Purchasers in accordance with the terms of the Agreement, will have been duly executed, authenticated, issued and delivered, and will constitute legal, valid and binding obligations of the Company and enforceable in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors’ rights generally or by general equitable principles.

 

4.2.4      Exemption from Registration . Neither the Company, nor its Subsidiary, nor any of its Affiliates, nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Subordinated Notes. Assuming the accuracy of the representations and warranties of each Purchaser set forth in this Agreement, the Subordinated Notes will be issued in a transaction exempt from the registration requirements of the Securities Act. No “bad actor” disqualifying event described in Rule 506(d)(1)(i)-(viii) of the Securities Act (a “ Disqualification Event ”) is applicable to the Company or, to the Company’s knowledge, any Person described in Rule 506(d)(1) (each, a “ Company Covered Person ”). The Company has exercised reasonable care to determine whether any Company Covered Person is subject to a Disqualification Event. The Company has complied, to the extent applicable, with its disclosure obligations under Rule 506(e).

 

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4.2.5      No Defaults or Restrictions . Neither the execution and delivery of the Transaction Documents nor compliance with their respective terms and conditions will (whether with or without the giving of notice or lapse of time or both) (i) violate, conflict with or result in a breach of, or constitute a default under: (1) the Charter or Bylaws of the Company; (2) any of the terms, obligations, covenants, conditions or provisions of any corporate restriction or of any contract, agreement, indenture, mortgage, deed of trust, pledge, bank loan or credit agreement, or any other agreement or instrument to which the Company or Bank, as applicable, is now a party or by which it or any of its properties may be bound or affected; (3) any judgment, order, writ, injunction, decree or demand of any court, arbitrator, grand jury, or Governmental Agency applicable to the Company or the Bank; or (4) any statute, rule or regulation applicable to the Company, except, in the case of items (2), (3) or (4), for such violations and conflicts that would not reasonably be expected to have, singularly or in the aggregate, a Material Adverse Effect on the Company and its Subsidiary, taken as a whole, or (ii) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or asset of the Company except that would not reasonably be expected to have, singularly or in the aggregate, a Material Adverse Effect on the Company and its Subsidiary, taken as a whole. Neither the Company nor the Bank is in default in the performance, observance or fulfillment of any of the terms, obligations, covenants, conditions or provisions contained in any indenture or other agreement creating, evidencing or securing Indebtedness of any kind or pursuant to which any such Indebtedness is issued, or any other agreement or instrument to which the Company or the Bank, as applicable, is a party or by which the Company or the Bank, as applicable, or any of its properties may be bound or affected, except, in each case, only such defaults that would not reasonably be expected to have, singularly or in the aggregate, a Material Adverse Effect on the Company and the Bank, taken as a whole.

 

4.2.6      Governmental Consent . No governmental orders, permissions, consents, approvals or authorizations are required to be obtained by the Company that have not been obtained, and no registrations or declarations are required to be filed by the Company that have not been filed in connection with, or, in contemplation of, the execution and delivery of, and performance under, the Transaction Documents, except for applicable requirements, if any, of the Securities Act, the Exchange Act or state securities laws or “blue sky” laws of the various states and any applicable federal or state banking laws and regulations.

 

4.3      Possession of Licenses and Permits . The Company and its Subsidiaries possesses such permits, licenses, approvals, consents and other authorizations (collectively, “ Governmental Licenses ”) issued by the appropriate Governmental Agencies necessary to conduct the business now operated by them except where the failure to possess such Governmental Licenses would not, singularly or in the aggregate, have a Material Adverse Effect on the Company or the Subsidiary; the Company and the Subsidiary of the Company is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, individually or in the aggregate, have a Material Adverse Effect on the Company or the Subsidiary; all of the Governmental Licenses are valid and in full force and effect, except where the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect on the Company or the Subsidiary; and neither the Company nor the Subsidiary of the Company has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses.

 

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4.4      Financial Condition .

 

4.4.1      Company Financial Statements . The financial statements of the Company included in the Company’s SEC Reports (including the related notes, where applicable), which have been provided to the Purchasers (i) have been prepared from, and are in accordance with, the books and records of the Company; (ii) fairly present in all material respects the results of operations, cash flows, changes in stockholders’ equity and financial position of the Company and its consolidated subsidiaries, for the respective fiscal periods or as of the respective dates therein set forth (subject in the case of unaudited statements to recurring year-end audit adjustments normal in nature and amount), as applicable; (iii) complied as to form, as of their respective dates of filing in all material respects with applicable accounting and banking requirements as applicable, with respect thereto; and (iv) have been prepared in accordance with GAAP consistently applied during the periods involved, except, in each case, as indicated in such statements or in the notes thereto. The books and records of the Company have been, and are being, maintained in all material respects in accordance with GAAP and any other applicable legal and accounting requirements. the Company does not have any material liability of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due), except for those liabilities that are reflected or reserved against on the consolidated balance sheet of the Company contained in the Company’s SEC Reports for the Company’s most recently completed quarterly or annual fiscal period, as applicable, and for liabilities incurred in the ordinary course of business consistent with past practice or in connection with this Agreement and the transactions contemplated hereby.

 

4.4.2      Absence of Default . Since the conclusion of the Company’s most recently completed fiscal year as reflected in the Company’s SEC Reports, no event has occurred which either of itself or with the lapse of time or the giving of notice or both, would give any creditor of the Company the right to accelerate the maturity of any material Indebtedness of the Company. The Company is not in default under any other Lease, agreement or instrument, or any law, rule, regulation, order, writ, injunction, decree, determination or award, non-compliance with which could reasonably be expected to result in a Material Adverse Effect on the Company and the Bank, taken as a whole.

 

4.4.3      Solvency . After giving effect to the consummation of the transactions contemplated by this Agreement, the Company has capital sufficient to carry on its business and transactions and is solvent and able to pay its debts as they mature. No transfer of property is being made and no Indebtedness is being incurred in connection with the transactions contemplated by this Agreement with the intent to hinder, delay or defraud either present or future creditors of the Company or the Subsidiary of the Company.

 

4.4.4      Ownership of Property . Each of the Company and its Subsidiary has good and marketable title as to all real property owned by it and good title to all assets and properties owned by the Company and the Subsidiary in the conduct of its businesses, whether such assets and properties are real or personal, tangible or intangible, including assets and property reflected in the most recent balance sheet contained in the Company’s SEC Reports or acquired subsequent thereto (except to the extent that such assets and properties have been disposed of in the ordinary course of business, since the date of such balance sheet), subject to no encumbrances, liens, mortgages, security interests or pledges, except (i) those items which secure liabilities for public or statutory obligations or any discount with, borrowing from or other obligations to the Federal Home Loan Bank, inter-bank credit facilities, reverse repurchase agreements or any transaction by the Bank acting in a fiduciary capacity, (ii) statutory liens for amounts not yet delinquent or which are being contested in good faith and (iii) such as do not, individually or in the aggregate, materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company or its Subsidiary. The Company and its Subsidiary, as lessee, has the right under valid and existing Leases of real and personal properties that are material to the Company or the Subsidiary, as applicable, in the conduct of its business to occupy or use all such properties as presently occupied and used by it. Such existing Leases and commitments to Lease constitute or will constitute operating Leases for both tax and financial accounting purposes except as otherwise disclosed in the Company’s SEC Reports and the Lease expense and minimum rental commitments with respect to such Leases and Lease commitments are as disclosed in all material respects in the Company’s SEC Reports.

 

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4.5      No Material Adverse Change . Since the conclusion of the Company’s most recently completed fiscal year ended as reflected in the Company’s SEC Reports, there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect on the Company or its Subsidiary.

 

4.6      Legal Matters .

 

4.6.1      Compliance with Law . Each of the Company and its Subsidiary (i) has complied with and (ii) is not under investigation with respect to, and, to the Company’s knowledge, has not been threatened to be charged with or given any notice of any material violation of any applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government, or any instrumentality or agency thereof, having jurisdiction over the conduct of its business or the ownership of its properties, except where any such failure to comply or violation would not reasonably be expected to have a Material Adverse Effect on the Company and its Subsidiary, taken as a whole. The Company and its Subsidiary is in compliance with, and at all times prior to the date hereof has been in compliance with, (x) all statutes, rules, regulations, orders and restrictions of any domestic or foreign government, or any Governmental Agency, applicable to it, and (y) its own privacy policies and written commitments to customers, consumers and employees, concerning data protection, the privacy and security of personal data, and the nonpublic personal information of its customers, consumers and employees, in each case except where any such failure to comply, would not result, individually or in the aggregate, in a Material Adverse Effect on the Company and its Subsidiary, taken as a whole. At no time during the two years prior to the date hereof has the Company or any of its Subsidiary received any written notice asserting any violations of any of the foregoing.

 

4.6.2      Regulatory Enforcement Actions . The Company and the Bank are in compliance in all material respects with all laws administered by and regulations of any Governmental Agency applicable to it or to them, the failure to comply with which would have a Material Adverse Effect on the Company and the Bank, taken as a whole. None of the Company or the Bank nor any of their respective officers or directors is now operating under any restrictions, agreements, memoranda, commitment letter, supervisory letter or similar regulatory correspondence, or other commitments (other than restrictions of general application) imposed by any Governmental Agency, nor are, to the Company’s knowledge, (a) any such restrictions threatened, (b) any agreements, memoranda or commitments being sought by any Governmental Agency , or (c) any legal or regulatory violations previously identified by, or penalties or other remedial action previously imposed by, any Governmental Agency remains unresolved.

 

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4.6.3      Pending Litigation . There are no actions, suits, proceedings or written agreements pending, or, to the Company’s knowledge, threatened or proposed, against the Company or its Subsidiary at law or in equity or before or by any federal, state, municipal, or other governmental department, commission, board, or other administrative agency, domestic or foreign, that, either separately or in the aggregate, would reasonably be expected to have a Material Adverse Effect on the Company and its Subsidiary, taken as a whole, or affect issuance or payment of the Subordinated Notes; and neither the Company nor its Subsidiary is a party to or named as subject to the provisions of any order, writ, injunction, or decree of, or any written agreement with, any court, commission, board or agency, domestic or foreign, that either separately or in the aggregate, will have a Material Adverse Effect on the Company and its Subsidiary, taken as a whole.

 

4.6.4      Environmental . No Property is or, to the Company’s knowledge, has been a site for the use, generation, manufacture, storage, treatment, release, threatened release, discharge, disposal, transportation or presence of any Hazardous Materials and neither the Company nor its Subsidiary has engaged in such activities. There are no claims or actions pending or, to the Company’s knowledge, threatened against the Company or its Subsidiary by any Governmental Agency or by any other Person relating to any Hazardous Materials or pursuant to any Hazardous Materials Law.

 

4.6.5      Brokerage Commissions . Except for commissions paid to the Placement Agents, neither the Company nor any Affiliate of the Company is obligated to pay any brokerage commission or finder’s fee to any Person in connection with the transactions contemplated by this Agreement.

 

4.6.6      Investment Company Act . Neither the Company nor the Bank is an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

 

4.7      No Misstatement . No information, exhibit, report, schedule or document, when viewed together as a whole, furnished by the Company to the Purchasers in connection with the negotiation, execution or performance of this Agreement. None of the representations, warranties, covenants and agreements made in this Agreement or in any certificate or other document delivered to the Purchasers by or on behalf of the Company pursuant to or in connection with this Agreement contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances when made or furnished to Purchasers and as of the date of this Agreement.

 

4.8      Reporting Compliance . The Company is subject to, and is in compliance in all material respects with, the reporting requirements of Section 13 and Section 15(d), as applicable, of the Exchange Act and the rules and the regulations of the SEC thereunder. The Company’s SEC Reports at the time they were or hereafter are filed with the SEC, complied in all material respects with the requirements of the Exchange Act and did not and do not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

 

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4.9      Internal Control Over Financial Reporting . The Company and its Subsidiary maintains systems of “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Exchange Act) that comply with the requirements of the Exchange Act and have been designed by, or under the supervision of, their respective principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including, but not limited to, a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Since the conclusion of the Company’s most recently completed fiscal year, (y) Company has no knowledge of (A) any material weakness in Company’s internal control over financial reporting (whether or not remediated) or (B) any fraud, whether or not material, that involves management or other employees who have a significant role in Company’s internal controls and (z) there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

4.10      Disclosure Controls and Procedures . The Company and its Subsidiary maintain an effective system of disclosure controls and procedures (as defined in Rule 13a-15 and Rule 15d-15 of the Exchange Act), that (i) are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that material information relating to the Company and its Subsidiary is made known to the Company’s principal executive officer and principal financial officer by others within the Company and its Subsidiary to allow timely decisions regarding disclosure, and (ii) are effective in all material respects to perform the functions for which they were established. As of the date hereof, the Company has no knowledge that would reasonably cause it to believe that the evaluation to be conducted of the effectiveness of the Company’s disclosure controls and procedures for the most recently completed fiscal quarter period will result in a finding that such disclosure controls and procedures are ineffective for such quarter ended. Based on the evaluation of the Company’s and the Subsidiary’s disclosure controls and procedures described above, the Company is not aware of (1) any significant deficiency in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data or any material weaknesses in internal controls or (2) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls. Since the most recent evaluation of the Company’s disclosure controls and procedures described above, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls.

 

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4.11      Representations and Warranties Generally . The representations and warranties of the Company set forth in this Agreement or in any other document delivered to Purchasers by or on behalf of the Company pursuant to or in connection with this Agreement are true and correct as of the date hereof and as otherwise specifically provided herein or therein.

 

5.

GENERAL COVENANTS, CONDITIONS AND AGREEMENTS .

 

The Company hereby further covenants and agrees with each Purchaser as follows:

 

5.1      Compliance with Transaction Documents . The Company shall comply with, observe and timely perform each and every one of the covenants, agreements and obligations under the Transaction Documents.

 

5.2      Affiliate Transactions . The Company shall not itself, nor shall it cause, permit or allow its Subsidiary to enter into any transaction, including, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate of the Company except in the ordinary course of business and pursuant to the reasonable requirements of the Company’s or such Affiliate’s business and upon terms consistent with applicable laws and regulations and reasonably found by the appropriate board(s) of directors to be fair and reasonable and no less favorable to the Company or such Affiliate than would be obtained in a comparable arm’s length transaction with a Person not an Affiliate.

 

5.3      Compliance with Laws .

 

5.3.1      Generally . The Company shall comply and cause the Bank to comply in all material respects with all applicable statutes, rules, regulations, orders and restrictions in respect of the conduct of its business and the ownership of its properties, except, in each case, where such noncompliance would not reasonably be expected to have a Material Adverse Effect on the Company.

 

5.3.2      Regulated Activities . The Company shall not itself, nor shall it cause, permit or allow the Bank to (i) engage in any business or activity not permitted by all applicable laws and regulations, except where such business or activity would not reasonably be expected to have a Material Adverse Effect on the Company or the Bank or (ii) make any loan or advance secured by the capital stock of another bank or depository institution, or acquire the capital stock, assets or obligations of or any interest in another bank or depository institution, in each case other than in accordance with applicable laws and regulations and safe and sound banking practices.

 

5.3.3      Taxes . The Company shall and shall cause the Bank to promptly pay and discharge all taxes, assessments and other governmental charges imposed upon the Company or the Bank or upon the income, profits, or property of the Company or the Bank and all claims for labor, material or supplies which, if unpaid, might by law become a lien or charge upon the property of the Company or the Bank. Notwithstanding the foregoing, none of the Company or the Bank shall be required to pay any such tax, assessment, charge or claim, so long as the validity thereof shall be contested in good faith by appropriate proceedings, and appropriate reserves therefor shall be maintained on the books of the Company and the Bank.

 

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5.3.4      Corporate Existence . The Company shall do or cause to be done all things reasonably necessary to maintain, preserve and renew its corporate existence and that of the Bank and its and their rights and franchises, and comply in all material respects with all related laws applicable to the Company or the Bank.

 

5.3.5      Dividends, Payments, and Guarantees During Event of Default . During the continuance of an Event of Default (as defined under the Subordinated Notes), except as required by any federal or state Governmental Agency, the Company shall not (a) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock; (b) make any payment of principal of, or interest or premium, if any, on, or repay, repurchase or redeem any of the Company’s Indebtedness that ranks equal with or junior to the Subordinated Notes; or (c) make any payments under any guarantee that ranks equal with or junior to the Subordinated Notes, other than (i) any dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, any class of the Company’s common stock; (ii) any declaration of a non-cash dividend in connection with the implementation of a shareholders’ rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto; (iii) as a result of a reclassification of the Company’s capital stock or the exchange or conversion of one class or series of the Company’s capital stock for another class or series of the Company’s capital stock; (iv) the purchase of fractional interests in shares of the Company’s capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged; or (v) purchases of any class of the Company’s common stock related to the issuance of common stock or rights under any benefit plans for the Company’s directors, officers or employees or any of the Company’s dividend reinvestment plans.

 

5.3.6      Tier 2 Capital . If all or any portion of the Subordinated Notes ceases to be deemed to be Tier 2 Capital, other than due to the limitation imposed on the capital treatment of subordinated debt during the five (5) years immediately preceding the Maturity Date of the Subordinated Notes, the Company will immediately notify the Noteholder (as defined in the Subordinated Note), and thereafter the Company and the Noteholder (as defined in the Subordinated Note) will work together in good faith to execute and deliver all agreements as reasonably necessary in order to restructure the applicable portions of the obligations evidenced by the Subordinated Notes to qualify as Tier 2 Capital; provided, however, that nothing contained in this Agreement shall limit the Company’s right to redeem the Subordinated Notes upon the occurrence of a Tier 2 Capital Event as described in the Subordinated Notes.

 

5.4      Absence of Control . It is the intent of the parties to this Agreement that in no event shall Purchasers, by reason of any of the Transaction Documents, be deemed to control, directly or indirectly, the Company, and Purchasers shall not exercise, or be deemed to exercise, directly or indirectly, a controlling influence over the management or policies of the Company.

 

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5.5      Secondary Market Transactions . Each Purchaser shall have the right at any time and from time to time to securitize its Subordinated Notes or any portion thereof in a single asset securitization or a pooled loan securitization of rated single or multi-class securities secured by or evidencing ownership interests in the Subordinated Notes (each such securitization is referred to herein as a “ Secondary Market Transaction ”). In connection with any such Secondary Market Transaction, the Company shall, at the Company’s expense, cooperate with Purchasers and otherwise reasonably assist Purchasers in satisfying the market standards to which Purchasers customarily adhere or which may be reasonably required in the marketplace or by applicable rating agencies in connection with any such Secondary Market Transaction. Subject to any written confidentiality obligation, all information regarding the Company may be furnished, without liability except in the case of gross negligence or willful misconduct, to any Purchaser and to any Person reasonably deemed necessary by Purchaser in connection with participation in such Secondary Market Transaction. All documents, financial statements, appraisals and other data relevant to the Company or the Subordinated Notes may be retained by any such Person.

 

5.6      Bloomberg . The Company shall use commercially reasonable efforts to cause the Subordinated Notes to be quoted on Bloomberg.

 

5.7      Rule 144A Information . While any Subordinated Notes remain “restricted securities” within the meaning of the Securities Act, the Company will make available, upon request, to any seller of such Subordinated Notes the information specified in Rule 144A(d)(4) under the Securities Act, unless the Company is then subject to Section 13 or 15(d) of the Exchange Act.

 

5.8      DTC Registration . Upon the request of a holder of a Subordinated Note that is a Qualified Institutional Buyers as defined in Rule 144A of the Securities Act (each, a “ QIB ”) and provided that the applicable depository eligibility requirements are met, the Company shall use commercially reasonable efforts to cause the Subordinated Notes held by such QIB to be registered in the name of Cede & Co. as nominee of The Depository Trust Company (“ DTC ”) or a nominee of DTC; provided, however, that the Company shall not be obligated to incur more than $5,000 in fees and expenses in connection with the registration of the Subordinated Note as contemplated by this section. For the avoidance of doubt, such limitation shall not apply to fees incurred in connection with the engagement and retention of a paying agent.

 

6.

REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS .

 

Each Purchaser hereby represents and warrants to the Company, and covenants with the Company, severally and not jointly, as follows:

 

6.1      Legal Power and Authority . It has all necessary power and authority to execute, deliver and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. It is an entity duly organized, validly existing and in good standing under the laws its jurisdiction of organization.

 

6.2      Authorization and Execution . The execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of such Purchaser, and this Agreement is a legal, valid and binding obligation of such Purchaser, enforceable against such Purchaser in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors’ rights generally or by general equitable principles.

 

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6.3      No Conflicts . Neither the execution, delivery or performance of the Transaction Documents nor the consummation of any of the transactions contemplated thereby will conflict with, violate, constitute a breach of or a default (whether with or without the giving of notice or lapse of time or both) under (i) its organizational documents, (ii) any agreement to which it is party, (iii) any law applicable to it or (iv) any order, writ, judgment, injunction, decree, determination or award binding upon or affecting it.

 

6.4      Purchase for Investment . It is purchasing the Subordinated Note for its own account and not with a view to distribution and with no present intention of reselling, distributing or otherwise disposing of the same. It has no present or contemplated agreement, undertaking, arrangement, obligation, Indebtedness or commitment providing for, or which is likely to compel, a disposition of the Subordinated Notes in any manner.

 

6.5      Institutional Accredited Investor . It is and will be on the Closing Date an institutional “accredited investor” as such term is defined in Rule 501(a) of Regulation D and as contemplated by subsections (1), (2), (3) and (7) of Rule 501(a) of Regulation D, and has no less than $5,000,000 in total assets.

 

6.6      Financial and Business Sophistication . It has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment in the Subordinated Notes. It has relied solely upon its own knowledge of, and/or the advice of its own legal, financial or other advisors with regard to, the legal, financial, tax and other considerations involved in deciding to invest in the Subordinated Notes.

 

6.7      Ability to Bear Economic Risk of Investment . It recognizes that an investment in the Subordinated Notes involves substantial risk. It has the ability to bear the economic risk of the prospective investment in the Subordinated Notes, including the ability to hold the Subordinated Notes indefinitely, and further including the ability to bear a complete loss of all of its investment in the Company.

 

6.8      Information . It acknowledges that: (i) it is not being provided with the disclosures that would be required if the offer and sale of the Subordinated Notes were registered under the Securities Act, nor is it being provided with any offering circular or prospectus prepared in connection with the offer and sale of the Subordinated Notes; (ii) it has conducted its own examination of the Company and the terms of the Subordinated Notes to the extent it deems necessary to make its decision to invest in the Subordinated Notes; and (iii) it has availed itself of publicly available financial and other information concerning the Company to the extent it deems necessary to make its decision to purchase the Subordinated Notes. It has reviewed the information set forth in the Company’s SEC Reports and the exhibits and schedules hereto and contained in the data room established by the Company in connection with the transactions contemplated by this Agreement.

 

6.9      Access to Information . It acknowledges that it and its advisors have been furnished with all materials relating to the business, finances and operations of the Company that have been requested by it or its advisors and have been given the opportunity to ask questions of, and to receive answers from, persons acting on behalf of the Company concerning terms and conditions of the transactions contemplated by this Agreement in order to make an informed and voluntary decision to enter into this Agreement.

 

18

 

 

6.10      Investment Decision . It has made its own investment decision based upon its own judgment, due diligence and advice from such advisors as it has deemed necessary and not upon any view expressed by any other Person or entity, including the Placement Agents. Neither such inquiries nor any other due diligence investigations conducted by it or its advisors or representatives, if any, shall modify, amend or affect its right to rely on the Company’s representations and warranties contained herein. It is not relying upon, and has not relied upon, any advice, statement, representation or warranty made by any Person by or on behalf of the Company, including, without limitation, the Placement Agents, except for the express statements, representations and warranties of the Company made or contained in this Agreement. Furthermore, it acknowledges that (i) the Placement Agents has not performed any due diligence review on behalf of it and (ii) nothing in this Agreement or any other materials presented by or on behalf of the Company to it in connection with the purchase of the Subordinated Notes constitutes legal, tax or investment advice.

 

6.11      Private Placement ; No Registration; Restricted Legends . It understands and acknowledges that the Subordinated Notes are being sold by the Company without registration under the Securities Act in reliance on the exemption from federal and state registration set forth in, respectively, Rule 506(b) of Regulation D under Section 4(a)(2) of the Securities Act and Section 18 of the Securities Act, or any state securities laws, and accordingly, may be resold, pledged or otherwise transferred only if exemptions from the Securities Act and applicable state securities laws are available to it. It is not subscribing for the Subordinated Notes as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or presented at any seminar or meeting. It further acknowledges and agrees that all certificates or other instruments representing the Subordinated Notes will bear the restrictive legend set forth in the form of Subordinated Note. It further acknowledges its primary responsibilities under the Securities Act and, accordingly, will not sell or otherwise transfer the Subordinated Notes or any interest therein without complying with the requirements of the Securities Act and the rules and regulations promulgated thereunder and the requirements set forth in this Agreement.

 

6.12      Placement Agents . It will purchase the Subordinated Note(s) directly from the Company and not from the Placement Agents and understands that neither the Placement Agents nor any other broker or dealer has any obligation to make a market in the Subordinated Notes.

 

6.13      Tier 2 Capital . If the Company provides notice as contemplated in Section 5.3.6 of the occurrence of the event contemplated in such section, thereafter the Company and the Purchasers will work together in good faith to execute and deliver all agreements as reasonably necessary in order to restructure the applicable portions of the obligations evidenced by the Subordinated Notes to qualify as Tier 2 Capital; provided, however, that nothing contained in this Agreement shall limit the Company’s right to redeem the Subordinated Notes upon the occurrence of a Tier 2 Capital Event as described in the Subordinated Notes.

 

6.14      Accuracy of Representations . It understands that each of the Placement Agents and the Company are relying upon the truth and accuracy of the foregoing representations, acknowledgements and agreements in connection with the transactions contemplated by this Agreement.

 

19

 

 

6.15      Representations and Warranties Generally . The representations and warranties of Purchaser set forth in this Agreement are true and correct as of the date hereof and will be true and correct as of the Closing Date and as otherwise specifically provided herein. Any certificate signed by a duly authorized representative of Purchaser and delivered to the Company or to counsel for the Company shall be deemed to be a representation and warranty by Purchaser to the Company as to the matters set forth therein.

 

7.

MISCELLANEOUS .

 

7.1      Prohibition on Assignment by the Company . Except as described in Section 8(b) (Merger or Sale of Assets) of the Subordinated Notes, the Company may not assign, transfer or delegate any of its rights or obligations under this Agreement or the Subordinated Notes without the prior written consent of all the Noteholders (as defined in the Subordinated Note). In addition, in accordance with the terms of the Subordinated Notes, any transfer of such Subordinated Notes by the Noteholders (as defined in the Subordinated Note) must be made in accordance with the Assignment Form attached thereto and the requirements and restrictions thereof.

 

7.2      Time of the Essence . Time is of the essence for this Agreement.

 

7.3      Waiver or Amendment . No waiver or amendment of any term, provision, condition, covenant or agreement herein or in the Subordinated Notes shall be effective except with the consent of at least fifty percent (50%) of the aggregate principal amount (excluding any Subordinated Notes held by the Company or any of its Affiliates) of the Subordinated Notes at the time outstanding; provided, however, that without the consent of each holder of an affected Subordinated Note, no such amendment or waiver may: (i) reduce the principal amount of the Subordinated Note; (ii) reduce the rate of or change the time for payment of interest on any Subordinated Note; (iii) extend the maturity of any Subordinated Note, (iv) change the currency in which payment of the obligations of the Company under this Agreement and the Subordinated Notes are to be made; or (v) lower the percentage of aggregate principal amount of outstanding Subordinated Notes required to approve any amendment of this Agreement or the Subordinated Notes, (vi) make any changes to Section 6 (Failure to Make a Payments) of the Subordinated Notes that adversely affects the rights of any holder of a Subordinated Note; or (vii) disproportionately affect the rights of any of the holders of the then outstanding Subordinated Notes. Notwithstanding the foregoing, the Company may amend or supplement the Subordinated Notes without the consent of the holders of the Subordinated Notes to cure any ambiguity, defect or inconsistency or to provide for uncertificated Subordinated Notes in addition to or in place of certificated Subordinated Notes, or to make any change that does not adversely affect the rights of any holder of any of the Subordinated Notes. No failure to exercise or delay in exercising, by a Purchaser or any holder of the Subordinated Notes, of any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right or remedy provided by law. The rights and remedies provided in this Agreement are cumulative and not exclusive of any right or remedy provided by law or equity. No notice or demand on the Company in any case shall, in itself, entitle the Company to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of Purchasers to any other or further action in any circumstances without notice or demand. No consent or waiver, expressed or implied, by Purchasers to or of any breach or default by the Company in the performance of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of the same or any other obligations of the Company hereunder. Failure on the part of Purchasers to complain of any acts or failure to act or to declare an Event of Default, irrespective of how long such failure continues, shall not constitute a waiver by Purchasers of their rights hereunder or impair any rights, powers or remedies on account of any breach or default by the Company.

 

20

 

 

7.4      Severabilitv . Any provision of this Agreement which is unenforceable or invalid or contrary to law, or the inclusion of which would adversely affect the validity, legality or enforcement of this Agreement, shall be of no effect and, in such case, all the remaining terms and provisions of this Agreement shall subsist and be fully effective according to the tenor of this Agreement the same as though any such invalid portion had never been included herein. Notwithstanding any of the foregoing to the contrary, if any provisions of this Agreement or the application thereof are held invalid or unenforceable only as to particular persons or situations, the remainder of this Agreement, and the application of such provision to persons or situations other than those to which it shall have been held invalid or unenforceable, shall not be affected thereby, but shall continue valid and enforceable to the fullest extent permitted by law.

 

7.5      Notices . Any notice which any party hereto may be required or may desire to give hereunder shall be deemed to have been given if in writing and if delivered personally, or if mailed, postage prepaid, by United States registered or certified mail, return receipt requested, or if delivered by a responsible overnight commercial courier promising next business day delivery, addressed:

 

if to the Company:

Patriot National Bancorp, Inc.

900 Bedford Street

Stamford, Connecticut  06901

 

Attention: Michael A. Carrazza

   

with a copy to (which shall not constitute notice):

Holland & Knight LLP

800 17th Street, NW Suite 1100

Washington DC  20006

 

Attention: Kevin Houlihan and Mark Goldschmidt

   

if to the Purchasers:

To the address indicated on such Purchaser’s signature page.

 

or to such other address or addresses as the party to be given notice may have furnished in writing to the party seeking or desiring to give notice, as a place for the giving of notice; provided that no change in address shall be effective until five (5) Business Days after being given to the other party in the manner provided for above. Any notice given in accordance with the foregoing shall be deemed given when delivered personally or, if mailed, three (3) Business Days after it shall have been deposited in the United States mails as aforesaid or, if sent by overnight courier, the Business Day following the date of delivery to such courier (provided next business day delivery was requested).

 

21

 

 

7.6      Successors and Assigns . This Agreement shall inure to the benefit of the parties and their respective heirs, legal representatives, successors and assigns; except that, unless a Purchaser consents in writing, no assignment made by the Company in violation of this Agreement shall be effective or confer any rights on any purported assignee of the Company. The term “successors and assigns” will not include a purchaser of any of the Subordinated Notes from any Purchaser merely because of such purchase.

 

7.7      No Joint Venture . Nothing contained herein or in any document executed pursuant hereto and no action or inaction whatsoever on the part of a Purchaser, shall be deemed to make a Purchaser a partner or joint venturer with the Company.

 

7.8      Documentation . All documents and other matters required by any of the provisions of this Agreement to be submitted or furnished to a Purchaser shall be in form and substance satisfactory to such Purchaser.

 

7.9      Entire Agreement . This Agreement and the Subordinated Notes along with the Exhibits thereto constitute the entire agreement between the parties hereto with respect to the subject matter hereof and may not be modified or amended in any manner other than by supplemental written agreement executed by the parties hereto. No party, in entering into this Agreement, has relied upon any representation, warranty, covenant, condition or other term that is not set forth in this Agreement or in the Subordinated Notes.

 

7.10      Choice of Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to its laws or principles of conflict of laws. Nothing herein shall be deemed to limit any rights, powers or privileges which a Purchaser may have pursuant to any law of the United States of America or any rule, regulation or order of any department or agency thereof and nothing herein shall be deemed to make unlawful any transaction or conduct by a Purchaser which is lawful pursuant to, or which is permitted by, any of the foregoing.

 

7.11      No Third Party Beneficiary . This Agreement is made for the sole benefit of the Company and the Purchasers, and no other Person shall be deemed to have any privity of contract hereunder nor any right to rely hereon to any extent or for any purpose whatsoever, nor shall any other Person have any right of action of any kind hereon or be deemed to be a third party beneficiary hereunder; provided, that the Placement Agents may rely on the representations and warranties contained herein to the same extent as if it were a party to this Agreement.

 

7.12      Legal Tender of United States . All payments hereunder shall be made in coin or currency which at the time of payment is legal tender in the United States of America for public and private debts.

 

22

 

 

7.13      Captions; Counterparts . Captions contained in this Agreement in no way define, limit or extend the scope or intent of their respective provisions. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. In the event that any signature is delivered by facsimile transmission, or by e-mail delivery of a “.pdf’ format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

 

7.14      Knowledge; Discretion . All references herein to a Purchaser’s or the Company’s knowledge shall be deemed to mean the knowledge of such party based on the actual knowledge of such party’s Chief Executive Officer and Chief Financial Officer or such other persons holding equivalent offices. Unless specified to the contrary herein, all references herein to an exercise of discretion or judgment by a Purchaser, to the making of a determination or designation by a Purchaser, to the application of a Purchaser’s discretion or opinion, to the granting or withholding of a Purchaser’s consent or approval, to the consideration of whether a matter or thing is satisfactory or acceptable to a Purchaser, or otherwise involving the decision making of a Purchaser, shall be deemed to mean that such Purchaser shall decide using the reasonable discretion or judgment of a prudent lender.

 

7.15      Waiver Of Right To Jury Trial . TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT THAT THEY MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH ANY OF THE TRANSACTION DOCUMENTS, OR ANY OTHER STATEMENTS OR ACTIONS OF COMPANY OR PURCHASERS. THE PARTIES ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL SELECTED OF THEIR OWN FREE WILL. THE PARTIES FURTHER ACKNOWLEDGE THAT (I) THEY HAVE READ AND UNDERSTAND THE MEANING AND RAMIFICATIONS OF THIS WAIVER, (II) THIS WAIVER HAS BEEN REVIEWED BY THE PARTIES AND THEIR COUNSEL AND IS A MATERIAL INDUCEMENT FOR ENTRY INTO THIS AGREEMENT AND (III) THIS WAIVER SHALL BE EFFECTIVE AS TO EACH OF SUCH TRANSACTION DOCUMENTS AS IF FULLY INCORPORATED THEREIN.

 

7.16      Expenses . Except as otherwise provided in this Agreement, each of the parties will bear and pay all other costs and expenses incurred by it or on its behalf in connection with the transactions contemplated pursuant to this Agreement.

 

7.17      Survival . Each of the representations and warranties set forth in this Agreement shall survive the consummation of the transactions contemplated hereby for a period of one year after the date hereof. Except as otherwise provided herein, all covenants and agreements contained herein shall survive until, by their respective terms, they are no longer operative.

 

[Signature Pages Follow]

 

23

 

 

IN WITNESS WHEREOF , the Company has caused this Subordinated Note Purchase Agreement to be executed by its duly authorized representative as of the date first above written.

 

 

COMPANY :

 

     
  PATRIOT NATIONAL BANCORP, INC.  

 

 

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

Name:

Joseph D. Perillo

 

 

 

Title:

Executive Vice President and Chief Financial Officer

 

 

[Company Signature Page to Subordinated Note Purchase Agreement]

 

S-1

 

 

IN WITNESS WHEREOF , the Purchaser has caused this Subordinated Note Purchase Agreement to be executed by its duly authorized representative as of the date first above written.

 

 

 

PURCHASER :

 

     
     
     

 

 

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

       
  Address of Purchaser :
   
   
   
   
 

Principal Amount of Purchased Subordinated Note :

       
  $    

 

S-2

EXHIBIT 31 (1)

 

Certification

By Chief Executive Officer

Pursuant to Rule 13a-14

 

I, Michael A. Carrazza, certify that:

 

1.     I have reviewed this quarterly report on Form 10-Q of Patriot National Bancorp, Inc;

 

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America;

 

(c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

/s/ Michael A. Carrazza

Michael A. Carrazza,

Chief Executive Officer

(Principal Executive Officer)

 

August 14, 2018

EXHIBIT 31 (2)

 

Certification

By Principal Financial Officer

Pursuant to Rule 13a-14

 

I, Joseph D. Perillo , certify that:

 

1.     I have reviewed this quarterly report on Form 10-Q of Patriot National Bancorp, Inc;

 

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.     The registrant’s other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America;

 

(c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

/s/ Joseph D. Perillo

Joseph D. Perillo

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

August 14, 2018

 

Exhibit 32

 

Certification Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the Quarterly Report of Patriot National Bancorp, Inc. (the “ Company ”) on Form 10-Q for the period ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), we, Michael A. Carrazza and Joseph D. Perillo, the Chief Executive Officer and the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)     The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

/s/ Michael A. Carrazza

Michael A. Carrazza

Chief Executive Officer

   
   
   
   
 

/s/ Joseph D. Perillo

Joseph D. Perillo

Chief Financial Officer

 

August 14, 2018

 

 

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

The foregoing certification is being furnished to the Securities and Exchange Commission and shall not be considered filed as part of the Report.