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



This Quarterly Report on Form 10-Q contains statements that relate to future
events and expectations and, as such, constitute forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995.
Certain statements, other than purely historical information, including
estimates, projections, statements relating to our strategies, outlook, business
and financial prospects, business plans, objectives, and expected operating
results, and the assumptions upon which those statements are based, are
"forward-looking statements." These forward-looking statements generally are
identified by the words "believes," "project," "expects," "anticipates,"
"estimates," "intends," "strategy," "plan," "may," "will," "would," "will be,"
"will continue," "will likely result," and similar expressions. Forward-looking
statements are based on current expectations and assumptions that are subject to
risks and uncertainties which may cause actual results to differ materially from
the forward-looking statements. Forward-looking statements are not guarantees of
future performance. Although Patriot believes that the expectations reflected in
any forward-looking statements are based on reasonable assumptions, these
expectations may not be attained and it is possible that actual results may
differ materially from those indicated by these forward-looking statements due
to a variety of risks, uncertainties and changes in circumstances, many of which
are beyond Patriot's control.



Many possible events or factors could affect Patriot's future financial results
and performance and could cause the actual results, performance or achievements
of Patriot to differ materially from any anticipated results expressed or
implied by such forward-looking statements. Such risks and uncertainties
include, among others:

(1) changes in prevailing interest rates which would affect the interest earned
on the Company's interest earning assets and the interest paid on its interest
bearing liabilities;

(2) the schedule for revaluation of the Company’s interest-bearing assets and interest-bearing liabilities;

(3) the effect of changes in government monetary policy;

(4) the effect of changes in regulations applicable to the Company and the Bank and the conduct of its affairs;

(5) changes in competition among financial services companies, including possible additional encroachment by non-banks on services traditionally provided by banks;

(6) the ability of competitors larger than the Company to provide products and services that the Company is unable to provide;

(7) the state of the economy and real estate values ​​in the Company’s market areas, and the resulting effect on the quality of the Company’s loans;

(8) demand for loans and deposits in our market area;

(9) recent governmental initiatives that are expected to have a profound effect
on the financial services industry and could dramatically change the competitive
environment of the Company;

(10) other legislative or regulatory changes, including those related to residential mortgages, changes in accounting standards, and Federal Deposit Insurance Corporation (“FDIC”) premiums that may adversely affect the Company;

(11) the application of generally accepted accounting principles in The United States of America (“WE GAAP”), applied consistently;

(12) the fact that a period of reported results may not be indicative of future periods;

(13) the state of the economy in the greater New York metropolitan area and its
particular effect on the Company's customers, vendors and communities and other
such factors, including risk factors, as may be described in the Company's other
filings with the Securities and Exchange Commission (the "SEC");

(14) political, social, legal and economic instability, civil unrest, war, catastrophic events, acts of terrorism;

(15) widespread infectious disease outbreaks, including the current novel coronavirus (COVID-19) outbreak;

(16) changes in the level and direction of loan defaults and write-offs and changes in estimates of the adequacy of the loan loss provision;

(17) our ability to access cost-effective financing;

(18) our ability to implement and change our business strategies;

(19) changes in the quality or composition of our loan or investment portfolios;

(20) technological changes that may be more difficult or costly than anticipated;

(21) our ability to manage market risk, credit risk and operational risk in the current economic environment;

(22) our ability to successfully enter new markets and capitalize on growth opportunities;

(23) changes in consumer spending, borrowing and saving habits;

(24) our ability to retain key employees; and

(25) our compensation expense associated with equity allocated or attributed to our employees.



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The risks and uncertainties included here are not exhaustive. In addition to
those included herein further information concerning our business, including
additional factors that could materially affect our financial results, is
included in our other filings with the SEC, including our Annual Report on Form
10-K for the year ended December 31, 2021 (the "2021 Form 10-K"). Further, it is
not possible to assess the effect of all risk factors on our businesses or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results. In addition, we
disclaim any obligation to update any forward-looking statements to reflect
events or circumstances that occur after the date of this report.





CRITICAL ACCOUNTING POLICIES



The preparation of consolidated financial statements in accordance with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and to disclose
contingent assets and liabilities. Actual results could differ from those
estimates. Management has identified the accounting for the allowance for loan
and lease losses, the analysis and valuation of its investment securities, the
valuation of deferred tax assets, the impairment of goodwill, the valuation of
derivatives, and the valuation of servicing assets as certain of the Company's
most critical accounting policies and estimates in that they are important to
the portrayal of the Company's financial condition and results of operations.
They require management's most subjective and complex judgment as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. Refer to the 2021 Form 10-K for additional information.





Summary



The Company reported net income of $2.3 million ($0.59 basic and diluted
earnings per share) for the quarter ended September 30, 2022, compared to a net
income of $1.3 million ($0.34 basic and diluted earnings per share) for the
third quarter of 2021. For the nine months ended September 30, 2022, net income
was $4.4 million ($1.11 basic and diluted earnings per share), compared to a net
income of $3.2 million ($0.81 basic and diluted earnings per share) for the nine
months ended September 30, 2021. The prior year results included the recognition
of a non-recurring employee retention tax credit ("ERC") of $906,000 and $2.9
million for the three and nine months ended September 30, 2021, respectively,
while no ERC was recognized in 2022.



Along with reporting a substantial improvement in net interest income and strong
earnings, the Bank reported loan growth of 16.7% and deposit growth of 11.5%
compared to December 31, 2021. Net interest margin improved to 3.68% for the
quarter and 3.35% for the first three quarters of 2022, up from 2.87% for the
first three quarters of 2021. The Bank's prepaid debit card program continues to
be an increasing, low-cost funding source and has tripled in size to $169.1
million as of September 30, 2022, from $50.0 million in July 2020. The prepaid
portfolio growth contributes to a substantial improvement in the Bank's net
interest margin and overall funding costs.



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Financial Condition



Total assets increased $110.5 million to $1.1 billion as of September 30, 2022,
compared to $948.5 million at December 31, 2021, primarily due to the increase
in net loans which increased from $729.6 million at December 31, 2021, to $852.9
million at September 30, 2022. Total deposits increased from $748.6 million at
December 31, 2021, to $834.4 million at September 30, 2022.



Cash and Cash Equivalents


Cash and cash equivalents decreased $15.8 millionof $47.0 million at
December 31, 2021 at $31.2 million at September 30, 2022. The decrease in 2022 is mainly attributable to the cash used for the origination of the loans of $159.1 million and repurchase of credits of $125.8 millionwhich was partially offset by $159.2 million repayment of loans and increase in deposits of $85.8 million.


Investments


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


(In thousands)                              September 30       December 31,         Increase / (Decrease)
                                                2022               2021              ($)              (%)
U. S. Government agency and
mortgage-backed securities                 $       60,231     $       66,629     $    (6,398 )         -9.60 %
Corporate bonds                                    14,617             16,921          (2,304 )        -13.62 %
Subordinated notes                                  4,735              4,626             109            2.36 %
SBA loan pools                                      5,857              5,603             254            4.53 %
Municipal bonds                                       477                562             (85 )        -15.12 %
Total available-for-sale securities, at
fair value                                         85,917             94,341          (8,424 )         -8.93 %

Other investments, at cost                          4,450              4,450               -            0.00 %

                                           $       90,367     $       98,791     $    (8,424 )         -8.53 %




Total investments decreased by $8.4 million, from $98.8 million at December 31,
2021 to $90.4 million at September 30, 2022. The decrease in 2022 was primarily
attributable to the net unrealized loss of $18.6 million for the
available-for-sale securities, associated with rising market interest rates,
which was partially offset by an increase in purchase of available-for-sale
securities of $19.3 million. There were no sales of available-for-sale
securities in the three and nine months ended September 30, 2022. During the
three and nine months ended September 30, 2021, the Bank sold available-for-sale
securities of $14.8 million and $34.8 million, respectively, and recognized a
net gain of $26,000 and $119,000, respectively.



Loans held for investment


The following table shows the composition of the Company’s loan held for investment portfolio purposes at September 30, 2022 and December 31, 2021:


(In thousands)                      September 30, 2022          December 31, 2021
                                    Amount          %          Amount          %
Loan portfolio segment:
Commercial Real Estate            $  438,822        50.86 %   $ 365,247        49.38 %
Residential Real Estate              131,182        15.20 %     158,591        21.45 %
Commercial and Industrial            140,364        16.27 %     122,810        16.61 %
Consumer and Other                   138,135        16.01 %      59,364         8.03 %
Construction                          12,634         1.46 %      21,781         2.95 %
Construction to permanent - CRE        1,733         0.20 %      11,695         1.58 %
Loans receivable, gross              862,870       100.00 %     739,488       100.00 %
Allowance for loan losses             (9,952 )                   (9,905 )
Loans receivable, net             $  852,918                  $ 729,583




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The Company's loan portfolio increased $123.4 million, from $739.5 million at
December 31, 2021 to $862.9 million at September 30, 2022. The increase in loans
was attributable to $159.1 million of new loan origination and $125.8 million in
purchases of loans receivable which was partially offset by $159.2 million
paydown of the loans.



SBA loans held for investment were included in the commercial real estate loans
and commercial and industrial loan classifications above. As of September 30,
2022 and December 31, 2021, SBA loans included in the commercial and industrial
loan were $19.6 million and $17.4 million, respectively. SBA loans included in
the commercial real estate loans were $11.3 million and $9.7 million,
respectively.



At September 30, 2022, the net loan to deposit ratio was 102% and the net loan
to total assets ratio was 81%. At December 31, 2021, these ratios were 97% and
77%, respectively.


Allowance for losses on loans and leases



The allowance for loan and lease losses was $10.0 million as of September 30,
2022, compared to $9.9 million as of December 31, 2021. Based upon the overall
assessment and evaluation of the loan portfolio at September 30, 2022,
management believes $10.0 million in the allowance for loan and lease losses,
which represented 1.15% of gross loans outstanding, is adequate under prevailing
economic conditions to absorb existing losses in the loan portfolio, and a
provision for loan losses of $200,000 and $475,000 was recorded for the three
and nine months ended September 30, 2022, respectively.



The following table provides detail of activity in the allowance for loan and
lease losses:



                                           Three Months Ended September 30,            Nine Month Ended September 30,
(In thousands)                               2022                    2021                2022                   2021

Balance at beginning of the period      $         9,929         $        10,362     $        9,905         $       10,584
Charge-offs:
Commercial Real Estate                                -                       -                  -                    (51 )
Residential Real Estate                               -                       -                  -                     (3 )
Commercial and Industrial                             -                      (3 )              (70 )                 (212 )
Consumer and Other                                 (366 )                    (3 )             (513 )                  (23 )
Construction                                          -                       -                (68 )                  (69 )
Total charge-offs                                  (366 )                    (6 )             (651 )                 (358 )
Recoveries:
Commercial Real Estate                              154                       -                154                      -
Residential Real Estate                               3                       2                  4                      2
Commercial and Industrial                            12                      20                 38                     44
Consumer and Other                                   20                       1                 27                    107
Total recoveries                                    189                      23                223                    153

Net (charge-offs) recoveries                       (177 )                    17               (428 )                 (205 )
Provision (credit) for loan losses                  200                    (300 )              475                   (300 )
Balance at end of the period            $         9,952         $        10,079     $        9,952         $       10,079

Ratios:
Net (charge-offs) recoveries to
average loans                                    (0.020 )%                0.002 %           (0.052 )%              (0.029 )%
Allowance for loan losses to total
loans                                              1.15 %                100.00 %             1.15 %               100.00 %




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The following table provides an allocation of allowance for loan and lease
losses by portfolio segment:



(In thousands)                            September 30, 2022                          December 31, 2021
                                                           Percent of
                                                            loans in
                                                         each category                           Percent of loans
Allowance for loan and lease    Allowance for loan             to            Allowance for       in each category
losses                                losses              total loans         loan losses         to total loans
Commercial Real Estate         $              6,787               50.86 %   $         5,063                  49.38 %
Residential Real Estate                         468               15.20 %             1,700                  21.45 %
Commercial and Industrial                     1,838               16.27 %             2,532                  16.61 %
Consumer and Other                              739               16.01 %               253                   8.03 %
Construction                                     38                1.46 %                78                   2.95 %
Construction to permanent -
CRE                                               5                0.20 %                41                   1.58 %
Unallocated                                      77                 N/A                 238                    N/A
Total                          $              9,952              100.00 %   $         9,905                 100.00 %






Non-performing Assets



The following table presents non-performing assets as of September 30, 2022 and
December 31, 2021:



(In thousands)
                                                     September 30, 2022       December 31, 2021
Non-accruing loans:
Commercial Real Estate                              $             11,270     $            15,704
Residential Real Estate                                            3,061                   3,148
Commercial and Industrial                                          4,707                   4,101
Consumer and Other                                                   144                     142
Total non-accruing loans                                          19,182                  23,095

Loans past due over 90 days and still accruing                       230                       2
Total nonperforming assets                          $             19,412     $            23,097

Nonperforming assets to total assets                                1.83 %                  2.44 %
Nonperforming loans to total loans, net                             2.28 %                  3.17 %




As of September 30, 2022, the $19.2 million of non-accrual loans was comprised
of 31 borrowers, for which a specific reserve of $6.1 million was established.
Four TDR loans of total $9.7 million were included in the non-accrual loans. For
collateral dependent loans, the Bank has obtained appraisal reports from
independent licensed appraisal firms and discounted those values based on the
Bank's experience selling OREO properties and for estimated selling costs to
determine estimated impairment. For cash flow dependent loans, the Bank
determined the reserve based on the present value of expected future cash flows
discounted at the loan's effective interest rate. Non-accrual loans are included
in the impaired loans.



As of December 31, 2021, the $23.1 million of non-accrual loans was comprised of
30 borrowers, for which a specific reserve of $2.3 million was established.
Three TDR loans of total $9.7 million were included in the non-accrual loans as
of December 31, 2021.



Loans held for sale



SBA loans held for sale totaled $8.7 million and $3.1 million as of September
30, 2022 and December 31, 2021, respectively. SBA loans held for sale represent
the guaranteed portion of SBA loans and are reflected at the lower of aggregate
cost or market value. SBA loans held for sale at September 30, 2022, consisted
of $5.1 million SBA commercial real estate and $3.6 million SBA commercial and
industrial loans, respectively. SBA loans held for sale at December 31, 2021,
consisted of $2.6 million SBA commercial and industrial loans and $562,000 SBA
commercial real estate, respectively.



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Goodwill


The Company completed its acquisition of Prime Bank in May 2018 and registered
$1.1 million goodwill after adjustments to May 10, 2019. No other goodwill adjustments were made to the September 30, 2022.

The Company has not performed an interim goodwill test for the nine months ended
September 30, 2021 as no event has occurred that would trigger an impairment assessment.



Deferred Taxes



Deferred tax assets were $16.1 million and $12.1 million at September 30, 2022
and December 31, 2021, respectively. Deferred tax assets consist predominately
of state net operating losses, capitalized costs and allowances for loan losses.



The effective tax rate for the three and nine months ended September 30, 2022
was 6.3%, and 17.7%, respectively, compared to the effective tax rate of 26.6%
and 27.0% for the three and nine months ended September 30, 2021, respectively.
The lower effective tax rates in 2022 were due to the tax treatment of
merger-related expenses incurred in 2021 deemed deductible in the third quarter
of 2022 due to the previously announced termination of the merger agreement. The
Company's effective rates for both periods was also affected by states taxes and
non-deductible expenses.


Patriot plans to use state net operating loss carryforwards to reduce income taxes otherwise payable on current and future years’ taxable income.



Patriot evaluates its ability to realize its net deferred tax assets on a
quarterly basis. In doing so, management considers all available evidence, both
positive and negative, to determine whether it is more likely than not that the
deferred tax assets will be realized. In addition, management assesses tax
attributes including available tax planning strategies and state net operating
loss carry-forwards that do not begin to expire until the year of 2030. As of
December 31, 2021, after weighing both positive and negative evidence, Patriot
fully reversed the valuation allowance of $1.9 million recorded in 2020. No
valuation allowance was recorded as of September 30, 2022. The Company will
continue to evaluate its ability to realize its net deferred tax assets. If
future evidence suggests that it is more likely than not that additional
deferred tax assets will not be realized, the valuation allowance will be
adjusted.



Deposits



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



(In thousands)                                                                 Increase/(Decrease)
                               September 30,
                                    2022           December 31, 2021             $               %
Non-interest bearing:
Non-interest bearing           $      125,396     $           127,420     $      (2,024 )          (1.59 )%
Prepaid DDA                           122,308                  99,293            23,015            23.18 %
Total non-interest bearing            247,704                 226,713            20,991             9.26 %

Interest bearing:
Negotiable order of
withdrawal accounts                    38,435                  34,741             3,694            10.63 %
Savings                                87,443                 109,744           (22,301 )         (20.32 )%
Money market                          133,947                 113,428            20,519            18.09 %
Money market - prepaid
deposits                               46,825                  51,090            (4,265 )          (8.35 )%
Certificates of deposit,
less than $250,000                    180,253                 142,246            38,007            26.72 %
Certificates of deposit,
$250,000 or greater                    65,362                  53,584            11,778            21.98 %
Brokered deposits                      34,426                  17,016            17,410           102.32 %
Total Interest bearing                586,691                 521,849            64,842            12.43 %

Total Deposits                 $      834,395     $           748,562     $      85,833            11.47 %



The Bank has expanded its deposit and funding mix over the past year, while reducing its overall cost of funds.

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Borrowings



Total borrowings were $155.6 million and $120.7 million as of September 30, 2022
and December 31, 2021, respectively. Borrowings consist primarily of FHLB
advances, senior notes, subordinated notes, junior subordinated debentures and a
note payable. The senior notes, subordinated notes and junior subordinated
debentures contain affirmative covenants that require the Company to maintain
its and its subsidiaries' legal entity and tax status, pay its income tax
obligations on a timely basis, and comply with SEC and FDIC reporting
requirements.



Federal mortgage bank loans



The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B").
Borrowings from the FHLB-B are limited to a percentage of the value of qualified
collateral, as defined on the FHLB-B Statement of Products Policy. Qualified
collateral, as defined, primarily consists of mortgage-backed securities and
loans receivable that are required to be free and clear of liens and
encumbrances, and may not be pledged for any other purposes.



FHLB-B advances are structured to facilitate the Bank's management of its
balance sheet and liquidity requirements. Outstanding advances from the FHLB-B
increased from $90.0 million at December 31, 2021 to $125.0 million at September
30, 2022.



At September 30, 2022, the FHLB-B advances bore fixed rates of interest ranging
from 2.4% to 4.23% with maturities ranging from 7 days to 1.9 years, and have a
weighted average interest rate of 3.22%.



At September 30, 2022, collateral for FHLB-B borrowings consisted of a mixture
of real estate loans and securities with book value of $258.2 million. Remaining
unused borrowing capacity under this line totaled $42.4 million at September 30,
2022.


Additionally, Patriot has a $2.0 million revolving line of credit with the FHLB-B. For the three and nine months ended September 30, 2022 and 2021, no funds had been borrowed under the line of credit.

Interest expense incurred for the three and nine month periods ended September 30, 2022
were $806,000 and $2.3 million, respectively. For the three and nine months ended September 30, 2021interest charges were $756,000 and $2.2 millionrespectively.

Correspondent bank – Credit line



Patriot has entered into unsecured federal funds sweep and federal funds line of
credit facility agreements with certain correspondent banks. Borrowings
available under the agreements totaled $15 million at September 30, 2022 and
$5 million at December 31, 2021. The purpose of the agreements is to provide a
credit facility intended to satisfy overnight federal account balance
requirements and to provide for daily settlement of FRB, Automated Clearing
House (ACH), and other clearinghouse transactions.



There was no outstanding balance under the agreements at September 30, 2022 and
December 31, 2021. No interest expense incurred for the three and nine months
ended September 30, 2022 and 2021.



Other Borrowing



Patriot has pledged eligible loans as collateral to support borrowing capacity
at the Federal Reserve Bank of New York's ("FRBNY"). As of September 30, 2022,
the book value of the pledged loans totaled $20.4 million with a collateral
value of $14.3 million. There was no outstanding balance under the FRBNY
Borrower-in-Custody program at September 30, 2022.



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Senior notes



On December 22, 2016, the Company issued $12 million of senior notes bearing
interest at 7% per annum (the "Senior Notes"). On November 17, 2021, the
original maturity date of the Senior Notes was extended from December 22, 2021
to June 30, 2022.



On June 22, 2022, the Company amended and restated the Senior Notes. The
maturity date of the Senior Notes was further extended to December 31, 2022, and
the interest rate increases from (i) 7% to 7.25% from July 1, 2022 until
September 30, 2022 and (ii) from 7.25% to 7.50% thereafter. The Senior Notes can
be repaid at any time without penalty.



The 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.



For the three and nine months ended September 30, 2022, the Company recognized
interest expense of $218,000 and $638,000, respectively. For the three and nine
months ended September 30, 2021, the Company recognized interest expense of
$229,000 and $686,000, respectively.



Subordinated notes



On June 29, 2018, the Company entered into certain subordinated note purchase
agreements with two institutional accredited investors and completed a private
placement of $10 million of fixed-to-floating rate subordinated notes with the
maturity date of September 30, 2028 (the "Subordinated Notes") pursuant to
Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of
Regulation D promulgated thereunder.



The Subordinated Notes initially bears interest at 6.25% per annum, from and
including June 29, 2018, to but excluding, June 30, 2023, payable semi-annually
in arrears. From and including June 30, 2023, until but excluding June 30, 2028
or an early redemption date, the interest rate shall reset quarterly to an
interest rate per annum equal to the then current three-month LIBOR (but not
less than zero) plus 332.5 basis points, payable quarterly in arrears. The
Company may, at its option, beginning on June 30, 2023 and on any scheduled
interest payment date thereafter, redeem the Subordinated Notes.



In connection with the issuance of the Subordinated Notes, the Company incurred
$291,000 of debt issuance costs, which are being amortized over the term of the
Subordinated Notes to recognize a constant rate of interest expense.
At September 30, 2022 and December 31, 2021, $168,000 and $189,000 of
unamortized debt issuance costs were deducted from the face amount of the
Subordinated Notes included in the consolidated balance sheet, respectively.



For the three and nine months ended September 30, 2022, the Company recognized
interest expense of $163,000 and $491,000, respectively. For the three and nine
months ended September 30, 2021, the Company recognized interest expense of
$165,000 and $491,000, respectively.



Junior subordinated debt due to an unconsolidated trust



In 2003, the Patriot National Statutory Trust I ("the Trust"), which has no
independent assets and is wholly-owned by the Company, issued $8.0 million of
trust preferred securities. The proceeds, net of a $240,000 placement fee, were
invested in junior subordinated debentures issued by the Company, which invested
the proceeds in the Bank. The Bank used the proceeds to fund its operations.



Trust Preferred Securities are currently eligible for up to 25% of the capital of the Company Tier I capitalthe excess being qualified as Tier 2 capital.



The junior subordinated debentures are unsecured obligations of the Company. The
debentures are subordinate and junior in right of payment to all present and
future senior indebtedness of the Company. In addition to its obligations under
the junior subordinated debentures and in conjunction with the Trust, the
Company issued an unconditional guarantee of the trust preferred securities.



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The junior subordinated debentures bear interest at three-month LIBOR plus 3.15%
(6.79% at September 30, 2022) and mature on March 26, 2033, at which time the
principal amount borrowed will be due. The placement fee of $240,000 is
amortized and included as a component of the periodic interest expense on the
junior subordinated debentures, in order to produce a constant rate of interest
expense. As of September 30, 2022 and December 31, 2021, the unamortized
placement fee deducted from the face amount of the junior subordinated debt owed
to the unconsolidated trust amounted to $123,000 and $129,000, respectively, and
accrued interest on the junior subordinated debentures was $8,000 and $4,000,
respectively.



For the three and nine months ended September 30, 2022, the Company recognized
interest expense of $113,000 and $270,000, respectively. For the three and nine
months ended September 30, 2021, the Company recognized interest expense of
$69,000 and $209,000, respectively.



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


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 September 30, 2022 and December 31,
2021, the note had a balance outstanding of $637,000 and $791,000, respectively.
The note matures in August 2024 and requires a balloon payment of approximately
$234,000 at that time. The note is secured by a first Mortgage Deed and Security
Agreement on the purchased property.



For the three and nine months ended September 30, 2022the Company recorded an interest expense of $3,000 and $9,000, respectively. For the three and nine months ended September 30, 2021the Company recorded an interest expense of
$4,000 and $12,000respectively.


Derivatives



As of September 30, 2022, Patriot had entered into four interest rate swaps
("swaps"). Two swaps are with a loan customer to provide a facility to mitigate
the fluctuations in the variable rate on the respective loan. The other two
swaps are with an outside third party. The customer interest rate swaps are
matched in offsetting terms to the third party interest rate swaps. The swaps
are reported at fair value in other assets or other liabilities on the
consolidated balance sheets. Patriot's swaps are derivatives, but are not
designated as hedging instruments, thus any net gain or loss resulting from
changes in the fair value is recognized in other noninterest income. The Company
recognized no gain on the swaps for the three and nine months ended September
30, 2022 and 2021, respectively.



In April 2021, Patriot entered into a receive fixed/pay variable interest rate
swap, which was designated as a cash flow hedge. The cash flow hedge interest
rate swap contract was terminated in August 2021. No interest income was
recognized during the three and nine months ended September 30, 2022. During the
three and nine months ended September 30, 2021, the Company recognized $64,000
and $149,000 of accumulated other comprehensive income that was reclassified
into interest income, respectively. The swaps interest income was included in
interest and fees on loans on the consolidated statements of operations. A gain
of $512,000 was recognized from the termination of the interest rate swap cash
flow hedge for the three and nine months ended September 30, 2021, which was
included in other income on the consolidated statements of operations.



A more in-depth analysis of the fair value of derivatives is presented in note 8 of the consolidated financial statements.


Equity



Equity decreased $9.3 million, from $67.3 million at December 31, 2021 to $58.0
million at September 30, 2022, primarily due to $13.8 million of net unrealized
holding loss for investment portfolio, which was partially offset by $4.4
million of net income for the nine months ended September 30, 2022.



Off-balance sheet commitments

The Company’s off-balance sheet commitments, which mainly consist of loan commitments, increased $53.1 million of $127.0 million at December 31, 2021 at $187.3 million at September 30, 2022.

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Average Balances


The following tables show the average daily balances, interest income, interest expense and corresponding returns earned and rates paid for the three and nine month periods ended September 30, 2022 and 2021:


In thousands)                                    Three Months ended September 30,
                                          2022                                        2021
                          Average                                     Average
                          Balance        Interest        Yield        Balance       Interest        Yield
ASSETS
Interest Earning
Assets:
Loans                   $   877,759     $   11,250          5.08 %   $ 707,630     $    7,189          4.03 %
Investments                  94,187            654          2.78 %     133,723            751          2.25 %
Cash equivalents and
other                        25,364            135          2.11 %      45,202             20          0.18 %

Total interest
earning assets              997,310         12,039          4.79 %     886,555          7,960          3.56 %

Cash and due from
banks                         6,891                                      5,464
Allowance for loan
losses                       (9,862 )                                  (10,369 )
OREO                              -                                        807
Other assets                 65,963                                     60,448

Total Assets            $ 1,060,302                                  $ 942,905

Liabilities
Interest bearing
liabilities:
Deposits                $   601,039     $    1,493          0.99 %   $ 529,127     $      448          0.34 %
Borrowings                   99,565            806          3.21 %      98,380            756          3.05 %
Senior notes                 12,000            218          7.27 %      11,972            229          7.65 %
Subordinated debt            17,952            276          6.10 %      17,914            233          5.16 %
Note Payable and
other                           652              3          1.83 %         857              4          1.85 %

Total interest
bearing liabilities         731,208          2,796          1.52 %     658,250          1,670          1.01 %

Demand deposits             258,508                                    209,259
Other liabilities             9,056                                      8,595

Total Liabilities           998,772                                    876,104

Shareholders' equity         61,530                                     66,801

Total Liabilities and
Shareholders' Equity    $ 1,060,302                                  $ 942,905

Net interest income                     $    9,243                                 $    6,290

Interest margin                                             3.68 %                                     2.81 %
Interest spread                                             3.27 %                                     2.55 %




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(In thousands)                                    Nine Months ended September 30,
                                          2022                                        2021
                          Average                                     Average
                          Balance        Interest        Yield        Balance       Interest        Yield
ASSETS
Interest Earning
Assets:
Loans                   $   815,657     $   27,958          4.58 %   $ 696,978     $   22,199          4.26 %
Investments                  96,345          1,864          2.58 %      96,957          1,572          2.16 %
Cash equivalents and
other                        33,265            224          0.90 %      60,234             67          0.15 %

Total interest
earning assets              945,267         30,046          4.25 %     854,169         23,838          3.73 %

Cash and due from
banks                         6,371                                      3,771
Allowance for loan
losses                       (9,813 )                                  (10,483 )
OREO                              -                                      1,195
Other assets                 68,213                                     60,678

Total Assets            $ 1,010,038                                  $ 909,330

Liabilities
Interest bearing
liabilities:
Deposits                $   569,013     $    2,659          0.62 %   $ 526,969     $    1,856          0.47 %
Borrowings                   95,572          2,290          3.20 %      93,101          2,230          3.20 %
Senior notes                 12,000            638          7.09 %      11,954            686          7.65 %
Subordinated debt            17,942            761          5.67 %      17,905            700          5.23 %
Note Payable and
other                           703              9          1.71 %         906             12          1.77 %

Total interest
bearing liabilities         695,230          6,357          1.22 %     650,835          5,484          1.13 %

Demand deposits             241,670                                    185,167
Other liabilities             9,885                                      8,081

Total Liabilities           946,785                                    844,083

Shareholders' equity         63,253                                     65,247

Total Liabilities and
Shareholders' Equity    $ 1,010,038                                  $ 909,330

Net interest income                     $   23,689                                 $   18,354

Interest margin                                             3.35 %                                     2.87 %
Interest spread                                             3.03 %                                     2.60 %




                                       51
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The following table presents the change in interest-earning assets and
interest-bearing liabilities by major category and the related change in the
interest income earned and interest expense incurred thereon attributable to the
change in transactional volume in the financial instruments and the rates of
interest applicable thereto, comparing the three and nine months ended September
30, 2022 and 2021.



                         Three Months ended September 30,                

Nine months ended September 30,

                              2022 compared to 2021                            2022 compared to 2021
(In thousands)                 Increase/(Decrease)                              Increase/(Decrease)
                     Volume             Rate           Total          Volume             Rate           Total
Interest Earning
Assets:
Loans              $     1,773       $     2,288     $    4,061     $     3,404       $     2,355     $    5,759
Investments               (221 )             124            (97 )           (11 )             303            292
Cash equivalents
and other                   (8 )             123            115             (30 )             187            157

Total interest
earning assets           1,544             2,535          4,079           3,363             2,845          6,208

Interest bearing
liabilities:
Deposit                    159               886          1,045             342               461            803
Borrowings                   9                41             50              59                 1             60
Senior notes                 1               (12 )          (11 )             3               (51 )          (48 )
Subordinated
debt                         -                43             43               -                61             61
Note payable and
other                       (1 )               -             (1 )            (3 )               -             (3 )

Total interest
bearing
liabilities                168               958          1,126             401               472            873

Net interest
income             $     1,376       $     1,577     $    2,953     $     2,962       $     2,373     $    5,335






RESULTS OF OPERATIONS



For the three months ended September 30, 2022, interest income and dividend
income was $12.0 million, which increased $4.1 million or 51.2% as compared to
$8.0 million for the quarter ended September 30, 2021. Total interest expense
was $2.8 million, which increased $1.1 million or 67.4% as compared to $1.7
million for the quarter ended September 30, 2021. Net interest income was $9.2
million for the quarter ended September 30, 2022, which increased $2.9 million
or 46.9% from $6.3 million for the quarter ended September 30, 2021.



For the nine months ended September 30, 2022, interest income and dividend
income was $30.0 million, which increased $6.2 million or 26.0% as compared to
$23.8 million for the nine months ended September 30, 2021. Total interest
expense was $6.4 million, which increased $873,000 or 15.9% as compared to $5.5
million for the nine months ended September 30, 2021. Net interest income was
$23.7 million for the nine months ended September 30, 2022, which increased $5.3
million or 29.1% from $18.4 million for the nine months ended September 30,
2021.



The net interest margin showed continued improvement, with an increase to 3.68%
for the quarter ended September 30, 2022, compared with 2.81% for the third
quarter of 2021. For the nine months ended September 30, 2022, the net interest
margin increased to 3.35%, compared to 2.87% for the nine months ended September
30, 2021.



The 2022 increase in net interest income was primarily due to increase in
average loan balances accompanied by an increase in net interest margin as rates
earned on interest bearing assets increased at a faster pace than the ratees
paid on interest bearing liabilities. The improvement in net interest income and
margin was also due to the growth in the Bank's prepaid card business, which
resulted in a significant growth in average demand deposits.



Provision for Loan Losses



For the three and nine months ended September 30, 2022, a provision for loan
losses of $200,000 and $475,000 was recorded, respectively, compared to a credit
for loan losses of $300,000 for the three and nine months ended September 30,
2021.



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Non-interest income



Non-interest income for the three and nine months ended September 30, 2022 was
$654,000 and $2.2 million, respectively, as compared to $923,000 and $2.1
million for the three and nine months ended September 30, 2021, respectively.
The increases were primarily attributable to increased gains on sales of SBA
loans along with higher non-interest income from the prepaid card program in the
nine months of 2022.



Non-interest expense


Non-interest expenses for the three and nine month periods ended September 30, 2022
increased to $7.2 million and $20.1 millionrespectively, compared to $5.7 million and $16.4 million for the three and nine months ended September 30, 2021. Non-interest expenses for the nine months ended September 30, 2021
included an ERC of $2.9 millionwhile no ERC was recognized in 2022.


Provision for income taxes



The Company reported provision for income taxes of $157,000 and $944,000 for the
three and nine months ended September 30, 2022, respectively, as compared to a
provision for income taxes of $479,000 and $1.2 million for the three and nine
months ended September 30, 2021, respectively.



Liquidity


The liquidity of the Company’s balance sheet amounted to 9.2% of total assets at September 30, 2022compared to 11.4% at December 31, 2021. Liquidity, including readily available off-balance sheet funding sources, represented 16.2% of total assets to be held.
September 30, 2022compared to 21.7% at December 31, 2021.



The following categories of assets are considered balance sheet liquidity: cash
and due from banks, federal funds sold (if any), short-term investments (if
any), loans held for sale, and unpledged available-for-sale securities. In
addition, off balance sheet funding sources include collateral-based borrowing
available from the FHLB, correspondent bank borrowing lines, and brokered
deposits subject to internal limitations.



Liquidity is a measure of the Company's ability to generate adequate cash to
meet its financial obligations. The principal cash requirements of a financial
institution are to cover downward fluctuations in deposit accounts. Management
believes the Company's liquid assets provide sufficient coverage to satisfy loan
demand, cover potential fluctuations in deposit accounts, and to meet other
anticipated operational cash requirements.



Management manages its capital resources by seeking to maintain a capital
structure that will ensure an adequate level of capital to support anticipated
asset growth and absorb potential losses while effectively leveraging capital to
enhance profitability and return to shareholders. Dividends have not been paid
to shareholders since 2020 but may resume in future periods.



The Company’s main source of liquidity comes from capital repayments from the Bank. These principal repayments are subject to the approval of the OCC and are required from time to time to provide the funds necessary to service the Company’s debt payments.



Capital



In September 2019, the community bank leverage ratio (CBLR) framework was
jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying
community banks the option to use a simplified measure of capital adequacy
instead of risk-based capital, beginning with their March 31, 2020 Call Report.
Under the final rule a community bank may qualify for the CBLR framework if it
has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total
consolidated assets, and limited amounts of off-balance sheet exposures and
trading assets and liabilities. In September 2021, the Bank adopted the CBLR
framework. The Bank's Tier 1 leverage ratio as of September 30, 2022 and
December 31, 2021 was 9.23% and 9.86%, respectively, which is above the
well-capitalized required level of 9.0%.



Management continuously assesses the Bank’s capital adequacy with the aim of maintaining a “well capitalized” classification.

                                       53
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IMPACT OF INFLATION AND PRICE CHANGES



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.

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