Patriot National Bancorp Inc: Form 10-Q for the period ended Mar 31, 2026

"Safe Harbor" Statement Under Private Securities Litigation Reform Act of 1995

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

For a discussion of certain factors that could cause actual results to differ materially from those anticipated in this report, refer to the disclosures in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q, and Item 1A, “Risk Factors,” in the Company’s most recent Annual Report on Form 10-K. Patriot undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

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 credit losses as one of the Company’s most critical accounting estimates because it is important to the portrayal of the Company’s financial condition and results of operations and requires management to make subjective and complex judgments about matters that are inherently uncertain. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 for additional information regarding the Company’s critical accounting policies and estimates.

SUMMARY OF RESULTS

During the first quarter of 2026, the Company continued to execute its strategic plan, emphasizing balance sheet management, capital and liquidity management, and risk mitigation in response to ongoing regulatory expectations and evolving market conditions. The Company remains subject to the OCC Agreement, which continues to influence its capital, compliance, and operational priorities.

For the three months ended March 31, 2026, the Company reported a net loss of $1.8 million, or $(0.02) per basic and diluted share, compared to a net loss of $2.8 million, or $(0.21) per share, for the same period in 2025. The improvement in net loss reflects higher net interest income, increased non-interest income, and a reversal of provision for credit losses, partially offset by higher non-interest expenses.

FINANCIAL CONDITION

Total assets increased to $1.18 billion at March 31, 2026, from $1.09 billion at December 31, 2025, primarily due to growth in loans receivable and investment securities.

Cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash decreased from $207.1 million at December 31, 2025 to $109.2 million at March 31, 2026. The decrease was driven primarily by a strategic reallocation of liquidity into higher yielding asset classes, consistent with the Company’s strategic objectives and regulatory capital requirements. For further details, refer to the Consolidated Statements of Cash Flows.

Investment securities

Total investments increased by $18.6 million, or 8.3%, to $243.3 million at March 31, 2026, compared to $224.7 million at December 31, 2025. The investment portfolio continues to be composed primarily of U.S. Government agency and mortgage‑backed securities. The net increase was driven principally by $51.0 million in purchases of available‑for‑sale securities during 2026, reflecting the Company’s ongoing deployment of liquidity into investment securities as part of its balance sheet repositioning strategy. These purchases were partially offset by $29.1 million in sales proceeds, $2.0 million in principal paydowns, and a $2.2 million increase in unrealized losses. During the first quarter of 2026, the Bank recognized a net loss on sales of $34 thousand, compared to $4.5 million of sales with no net gain or loss during the same period in 2025.

Loans held for investment

Loans receivable, net, increased to $751.2 million from $585.7 million at year‑end, driven primarily by $133.1 million of loan purchases concentrated primarily in residential and commercial real estate.

The following table provides the composition of the Company’s loan held for investment portfolio as of March 31, 2026 and December 31, 2025:

(In thousands)

Commercial real estate remained the largest loan category as of March 31, 2026, comprising 52.2% of total gross loans, compared to 58.4% at December 31, 2025. Residential real estate loans increased to 23.3% of total gross loans from 13.4% at year‑end, driven primarily by loan purchases completed during the first quarter of 2026. SBA loans held for investment are included within the commercial real estate and commercial and industrial loan categories. As of March 31, 2026 and December 31, 2025, SBA loans classified as commercial real estate totaled $9.7 million. SBA loans included in the commercial and industrial loan category totaled $8.5 million at March 31, 2026, compared to $8.7 million at December 31, 2025.

As of March 31, 2026, the Company’s net loan‑to‑deposit ratio increased to 71.7% from 60.6% at December 31, 2025, while the net loan‑to‑total assets ratio increased to 63.8% from 53.8% over the period. These increases are consistent with the Company’s balance sheet repositioning strategy.

Commercial Real Estate Loans ("CRE")

The following table provides the composition of the commercial real estate loan portfolio segment as of March 31, 2026 and December 31, 2025:

(In thousands)

The following table provides the commercial real estate loan portfolio segment by geographic concentrations as of March 31, 2026 and December 31, 2025:

(In thousands)

(1) Outside Market consists of loans in all other states, none of which are greater than 5% of the total.

Commercial real estate and commercial and industrial loans represented approximately 74.3% of total gross loans at March 31, 2026. Accordingly, the Company’s credit performance remains significantly influenced by borrower operating performance, collateral values, and economic conditions in the markets and customer segments served by the Bank. For purposes of internal and regulatory CRE concentration monitoring, including under OCC Bulletin 2006-46, owner-occupied CRE loans are excluded from CRE totals and classified as commercial and industrial loans, although owner-occupied CRE loans are included in the CRE portfolio presentation above.

As of March 31, 2026, the Bank’s CRE concentration was 292% of Tier 1 capital plus allowance for credit loss, below the Bank’s concentration policy limit of 350%. Exceeding this threshold would not, by itself, indicate unsafe or unsound banking practices; however, it subjects the Bank to heightened supervisory expectations for portfolio management, risk assessment, and capital planning. Management maintains portfolio management procedures, underwriting standards, and stress testing practices consistent with these regulatory expectations.

Allowance for Credit Losses ("ACL") on Loans

The Company estimates its ACL under the CECL methodology in ASC 326. The allowance for credit losses was $7.8 million at March 31, 2026, compared to $6.8 million at December 31, 2025. Based on management’s evaluation of the loan portfolio at March 31, 2026, management believed the ACL of $7.8 million, or 1.02% of gross loans, was appropriate to absorb expected credit losses in the loan portfolio as of that date. The increase from December 31, 2025 reflected, in part, the initial allowance recorded on loans purchased during the first quarter of 2026 under ASU 2025-08.

Effective January 1, 2026, the Company adopted ASU 2025-08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans, on a prospective basis. The adoption did not impact the Company’s opening retained earnings. For loans purchased during the first quarter of 2026, the Company recorded an initial allowance for credit losses of $925 thousand as an adjustment to the amortized cost basis, consistent with the new standard.

The following table summarizes activity in the ACL:

(In thousands)

The net charge-offs decreased $1.5 million to $0.2 million as of March 31, 2026 from $(1.3) million as of March 31, 2025, Net charge-offs to average loans improved to a nominal net recovery for the three months ended March 31, 2026 from 0.19% for the period ended March 31, 2025. The decrease in net charge-offs in 2026 was primarily due to reductions and repositioning of the portfolio completed in 2025.

Average loans increased by $18.2 million to $728.7 million for the three months ended March 31, 2026 from $710.5 million for the three months ended March 31, 2025. The net increase reflected the Company’s repositioning efforts continuing in the first quarter of 2026, including restricted loan growth, portfolio runoff, and efforts to reduce risk and maintain liquidity.

Non-accrual loans

Non-accrual loans were $22.9 million as of March 31, 2026, compared to $29.7 million as of March 31, 2025. The ACL-to-non-accrual loans ratio was 34.01% as of March 31, 2026, compared to 22.65% as of March 31, 2025. The Company continues to actively manage and monitor credit risk, particularly in commercial real estate and consumer loan portfolios.

The following table presents non-accrual loans as of the dates indicated:

(In thousands)

Non-accrual loans decreased $1.5 million, to $22.3 million at March 31, 2026 from $24.4 million at December 31, 2025. At March 31, 2026, non-accrual loans were comprised of 71 loans, compared to 151 loans at December 31, 2025. At March 31, 2026, 35 loans were individually evaluated and a specific reserve of $2.3 million was established, compared to 9 individually evaluated loans and a specific reserve of $2.1 million at December 31, 2025. The increase in loan count and specific reserves on individually evaluated loans reflects continued enhanced loan-level analysis on certain credits within the portfolio, which resulted in refined reserve estimates for those loans. Individually evaluated loans are measured based on collateral value or discounted expected cash flows, as applicable.

Nonperforming assets to total assets improved to 1.94% at March 31, 2026 from 2.24% at December 31, 2025. Nonperforming loans to total loans, net decreased to 3.04% from 4.16%, primarily due to total loans increasing during the first quarter of 2026.

Loans held for sale

Loans held for sale totaled $20.1 million at March 31, 2026, compared to $24.5 million at December 31, 2025. These balances primarily consist of credit card receivables originated for certain digital payments customers and sold shortly after origination to third parties.

Deferred Taxes

As of March 31, 2026 and December 31, 2025 the carrying value of the deferred tax assets (“DTAs”) was zero because a full valuation allowance was maintained against all DTAs. Patriot evaluates the realizability of its deferred tax assets on a quarterly basis, considering all available evidence, both positive and negative, including recent operating results, cumulative earnings or losses, projections of future taxable income, reversal of existing taxable temporary differences, and tax planning strategies.

At March 31, 2026, the Company continued to maintain a full valuation allowance, primarily due to cumulative losses in recent years, which constituted significant negative evidence regarding realizability. Although the Bank returned to profitability at the bank level during 2025, the Company remained unprofitable on a consolidated basis for the three months ended March 31, 2026 and for the year ended December 31, 2025. Based on improved operating performance and current projections, the Company continues to evaluate whether a full valuation allowance will remain appropriate in future periods. If management concludes, based on sufficient positive evidence, that some or all of the valuation allowance is no longer necessary, the release of all or a portion of the valuation allowance could materially affect income tax expense and net income in the period of release.

As of March 31, 2026, Patriot had available approximately $56.5 million of Federal net operating loss carryforwards (“NOL”), of which approximately $15.5 million was subject to limitations under Internal Revenue Code §382. These amounts reflect the Company’s existing Section 382 analysis and do not reflect the effect, if any, of ownership changes or additional limitations that may have resulted from the Private Placement or the registered direct offerings completed during 2025, as no updated Section 382 analysis with respect to those transactions had been completed as of the date of these consolidated financial statements. Because the Company maintained a full valuation allowance against its deferred tax assets at March 31, 2026, management does not expect completion of such analysis to materially affect the net deferred tax asset balance reported as of that date, although it could affect the amount and availability of NOL carryforwards for future periods.

For the three months ended March 31, 2026, the Company recorded income tax expense of $13 thousand.

Deposits

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

(In thousands)

Total deposits increased to $1.05 billion, with further reductions in brokered deposits. Brokered deposits decreased $22.8 million to $31.9 million at March 31, 2026 from $54.7 million at December 31, 2025. These changes reflect the Company’s ongoing efforts to manage liquidity, reduce certain deposit concentrations, and support its broader balance sheet repositioning.

Borrowings

Total borrowings were $26.4 million at March 31, 2026, compared to $16.4 million at December 31, 2025. The increase was primarily attributable to $10.0 million of short-term Federal Home Loan Bank (“FHLB”), FRB and correspondent bank borrowings outstanding at quarter-end, while subordinated debt and junior subordinated debt remained substantially unchanged at $8.3 million and $8.2 million, respectively.

Shareholders’ Equity

Equity decreased $4.5 million to $90.2 million at March 31, 2026 from $94.7 million at December 31, 2025. The decrease was primarily driven by the change in unrealized loss on available for sale securities of $2.2 million and a net loss of $1.8 million,

Average Balances

The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the three months ended March 31, 2026 and 2025:

(In thousands)

46

The following table presents the change in interest-earning assets and interest-bearing liabilities by major category and the related change in the interest income earned and interest expense incurred thereon attributable to the change in transactional volume in the financial instruments and the rates of interest applicable thereto, comparing the three months ended March 31, 2026 and 2025.

(In thousands)

Results of Operations

For the three months ended March 31, 2026, the Company reported a net loss of $1.8 million, or $(0.02) per basic and diluted share, compared to a net loss of $2.8 million, or $(0.21) per share, for the same period in 2025. The improvement in net loss reflects higher net interest income, increased non-interest income, and a reversal of provision for credit losses, partially offset by higher non-interest expenses.

Net interest income

Net interest income represents the difference between interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities. It is affected by the relative levels of interest-earning assets and interest-bearing liabilities, as well as the interest rates earned or paid on these balances.

Net interest income increased to $7.1 million for the quarter, up from $4.0 million in the prior year period, driven by higher yields on loans and investment securities, and a reduction in interest expense as deposit costs stabilized.

Interest expense decreased $1.0 million, or 11.6%, to $7.6 million for the period ended March 31, 2026, primarily reflecting lower average rates on interest‑bearing deposit liabilities and the payoff of senior notes in 2025, which contributed $322 thousand of the decrease.

Net interest margin increased to 2.46% for the quarter from 1.64% in the first quarter of 2025, reflecting higher earning asset yields and stabilized funding costs. Balance sheet optimization efforts, including the reduction of lower yielding assets and management of deposit costs, supported the margin expansion.

Provision (Credit) for credit losses

The Company recorded a net recovery of $181 thousand in provision for credit losses for the three months ended March 31, 2026, compared to a $733 thousand provision for the same period in the prior year. The net recovery in the current-year period reflected improved credit performance and reserve dynamics during the quarter. The increase in the ACL balance at March 31, 2026 from December 31, 2025 also reflected the initial allowance recorded on loans purchased during the first quarter of 2026 under ASU 2025-08; however, consistent with that standard, the initial allowance was recorded as an adjustment to amortized cost basis rather than through provision expense.

Non-interest income

Non-interest income increased to $3.2 million, primarily due to growth in fee income from digital payments customers, partially offset by lower deposit and loan fee income.

Non-interest expense

Non-interest expense increased to $12.2 million, reflecting higher salaries and benefits, professional services, and regulatory costs associated with operational and compliance and risk management initiatives.

LIQUIDITY AND CAPITAL RESOURCES

The Company monitors liquidity using, among other measures, on-hand liquidity to total liabilities, and total liquidity to total liabilities. On-hand liquidity is comprised of interest-bearing cash and cash equivalents and unpledged available-for-sale securities. Total liquidity includes on-hand liquidity plus unused borrowing capacity and other available contingent funding sources, including brokered deposit capacity subject to internal limits. The Company also monitors other metrics to manage liquidity and concentration risk in its funding base.

The Company's on-hand liquidity and total liquidity ratios for the year ended March 31, 2026 and December 31, 2025, are as follows:

(In thousands)

On-hand liquidity decreased by $175.8 million from December 31, 2025 primarily reflecting the Company's reallocation of cash and cash equivalents to higher yielding assets, including the acquisition and originations of loan receivables, resulting in a net increase of $165.5 million in the period. The Company also increased the amount of available-for-sale securities pledged to the FHLB during the quarter. Although that pledge reduced on-hand liquidity as defined for this measure, it increased immediately available borrowing capacity from the FHLB and improved the Company’s contingent liquidity. On-hand liquidity to total liabilities was 20.0% at quarter-end.

Liquidity represents the Company’s ability to meet its financial obligations as they come due, including deposit withdrawals, funding commitments, debt service, and other operating needs. Management believes the Company’s liquidity position at March 31, 2026 was sufficient to meet expected funding needs and reasonably anticipated deposit fluctuations.

Net cash used in operating activities for the three months ended March 31, 2026 was $2.9 million, representing an improvement of $2.9 million compared to $5.8 million used in the same period of 2025, primarily due to a lower net loss and more favorable working capital movements.

Net cash used in investing activities was $186.2 million, compared to $34.3 million provided by investing activities in the prior-year period. The primary drivers for the period-over-period change is the $165.5 million in net new loan investments in residential and commercial real estate and the net purchase amount of available for sale securities of $51 million.

Net cash provided by financing activities was $91.1 million from $54.9 million used in the prior-year period. Total deposits increased by $82.6 million and The Company drew $10.0 million in FHLB advances to manage short-term liquidity, with no new long-term debt issued during the quarter.

As a result of the foregoing, cash, cash equivalents and restricted cash decreased $97.9 million during 2026, compared to an decrease of $26.4 million for the same period in 2025. The decrease in cash and equivalents during the quarter primarily reflects the Company’s strategic redeployment of liquidity into higher-yielding loans and securities, as well as the normalization of deposit flows and funding sources.

REGULATORY CAPITAL REQUIREMENTS

As of March 31, 2026, the Bank’s regulatory capital ratios remained in excess of the minimum levels required under the OCC Agreement. Although the Bank’s capital ratios exceeded both the standard “well capitalized” thresholds and the higher minimums established by the OCC Agreement, the Bank remained classified as “adequately capitalized” rather than “well capitalized” due to the terms of the OCC Agreement. At March 31, 2026, the Bank’s total risk-based capital ratio was 16.25%, its Tier 1 risk-based capital ratio was 15.21%, its common equity Tier 1 capital ratio was 15.21%, and its Tier 1 leverage ratio was 9.45%. See Note 11 to the consolidated financial statements for additional information regarding the Company’s and the Bank’s regulatory capital amounts and ratios.

Market risk is the risk of loss from adverse changes in market prices and rates. The Bank’s market risk is primarily limited to interest rate risk, which is the risk that changes in interest rates may adversely affect net interest income, capital, and the economic value of assets and liabilities.

The Bank seeks to manage interest rate risk while maintaining appropriate earnings performance and liquidity. Interest rate risk arises from differences in the timing of the repricing or maturity of assets and liabilities, the effect of embedded options, and changes in funding mix. In managing this risk, the Bank considers asset and liability structure, loan and investment repricing characteristics, deposit behavior, and wholesale funding sources.

Interest rate risk is monitored by Management’s Asset and Liability Committee, which consists of senior management personnel. At the Board level, interest rate risk and related balance sheet exposures are reviewed through the Enterprise Risk Committee, which receives periodic reporting on interest rate risk, liquidity, and investment activities.

Management evaluates interest rate risk using net interest income simulation and net portfolio value analysis, each of which is prepared on a quarterly basis. These models estimate the effect of instantaneous changes in interest rates under a range of rate scenarios. The analyses incorporate assumptions regarding asset and liability repricing, prepayments, deposit behavior, and changes in spreads between market rates. Because these analyses are based on assumptions and estimates, actual results may differ materially from those reflected in the model outputs.

The tables below present estimated changes in net portfolio value and net interest income under selected instantaneous interest rate shock scenarios at March 31, 2026 and December 31, 2025.

(In thousands)

50

(In thousands)

These measures are analytical tools used by management to assess interest rate risk exposure at a point in time and should not be viewed as forecasts. The results are subject to limitations, including the use of assumptions regarding balance sheet composition, pricing behavior, and customer response to changes in interest rates.

Impact of Inflation and Changing Prices

The Company’s financial statements have been prepared in terms of historical dollars, without considering changes in relative purchasing power of money over time due to inflation. Because virtually all of the assets and liabilities of a financial institution are monetary in nature, interest rates generally have a more significant effect on the Bank’s performance than the effect of general inflation. However, inflation may affect customer repayment capacity, funding costs, operating expenses, and the value of loan collateral, including real estate, and therefore could affect the Company’s results of operations in future periods.

Evaluation of Disclosure Controls and Procedures

As of March 31, 2026, the Company carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2026 because of the material weakness in internal control over financial reporting previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.

Internal Control Remediation Activities

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025, management concluded that a material weakness existed in the Company’s internal control over financial reporting related to deficiencies in documentation, evidential support, and consistent execution of controls, including information technology general controls, financial close and reconciliation controls, and controls over certain third party and digital payments activities.

During the quarter ended March 31, 2026, management continued to implement remediation measures designed to address the material weakness, including formalizing additional documentation protocols, enhancing evidence retention and monitoring, refining financial close and reconciliation review procedures, continuing implementation of information technology general control enhancements, and further clarifying control responsibilities and oversight. Many of these remediation measures remain in process, and the Company will not consider the material weakness remediated until the applicable remediated controls have operated effectively for a sufficient period of time and management has completed testing sufficient to conclude that the material weakness has been remediated.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2026, the Company continued to implement remediation measures related to the previously disclosed material weakness, including enhancements to documentation, evidencing, monitoring, financial close and reconciliation procedures, information technology general controls, and controls over certain third party and digital payments activities. Other than such remediation measures, there were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2026 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The following risk factor supplements the risk factors previously disclosed in Patriot's Annual Report on Form 10-K for the year ended December 31, 2025. There have been no other material changes to the risk factors disclosed therein.

Patriot's role as issuing bank under third-party credit and charge card programs exposes it to credit, counterparty, reputational, liquidity, regulatory, litigation, and other risks.

Patriot originates receivables under certain third-party credit and charge card programs that are expected to be purchased shortly after origination by the applicable program manager or other third parties. If those purchases are not completed as expected, or if a program manager or other counterparty becomes financially distressed, insolvent, or otherwise fails to perform its obligations, Patriot may face operational disruption, disputes with program participants and their financial partners, reputational harm, regulatory or supervisory scrutiny, increased costs, and litigation. Any such events could adversely affect Patriot’s financial condition, results of operations, or liquidity.