PATRIOT NATIONAL BANCORP INC (PNBK)

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

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

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

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 related disclosures. Actual results could differ from those estimates. Management has identified the allowance for credit losses and the realizability of deferred tax assets as among the Company’s most critical accounting estimates because they are important to the portrayal of the Company’s financial condition and results of operations and require 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 and Note 14, Income Taxes, for additional information.

SUMMARY OF RESULTS

The Company continued to execute its strategic plan during the six months ended June 30, 2026, with a focus on balance sheet growth, capital optimization, and risk management. Significant regulatory milestones were achieved during and shortly after the quarter. On June 30, 2026, when the OCC formally terminated its Formal Agreement with the Bank, resulting in the Bank's reclassification from "adequately capitalized" to "well capitalized" under applicable regulatory standards. On July 7, 2026, the OCC also notified the Bank that it no longer considered the Bank to be in “troubled condition” for purposes of applicable law and regulation.

For the three months ended June 30, 2026, the Company reported net income of $0.1 million, or $0.00 per basic and diluted share, compared to a net loss of $5.0 million, or $(0.06) per share, for the same period in 2025. For the six months ended June 30, 2026, the Company reported a net loss of $1.6 million, or $(0.01) per share, compared to a net loss of $7.8 million, or $(0.17) per share, for the same period in 2025. The improvement reflects higher net interest income and increased non-interest income, partially offset by higher operating expenses.

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FINANCIAL CONDITION

Total assets increased to $1.32 billion at June 30, 2026, from $1.09 billion at December 31, 2025, primarily driven by loan origination and purchase activity and continued growth of the investment securities portfolio.

Cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash decreased from $207.1 million at December 31, 2025 to $121.5 million at June 30, 2026. The decrease was driven primarily by a strategic reallocation of liquidity into higher yielding asset classes, consistent with the Company’s strategic objectives. For further details, refer to the Consolidated Statements of Cash Flows.

Investment securities

Total investments increased by $15.7 million, or 7.0%, to $240.3 million at June 30, 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, $3.9 million in principal paydowns, and a $4.1 million increase in unrealized losses.

At June 30, 2026, securities of $132.7 million were pledged to the FHLB or FRB at June 30, 2026, compared to $15.1 million at December 31, 2025. Of the June 30, 2026 amount, approximately $98.1 million was pledged to the FHLB to support available borrowing capacity, with no FHLB borrowings outstanding at quarter-end. Approximately $34.6 million was pledged to the FRB in connection with requirements applicable to the Bank while it was considered to be in troubled condition; no FRB borrowings were outstanding at June 30, 2026.

Loans held for investment

Loans receivable, net, increased to $877.4 million at June 30, 2026 from $585.7 million at December 31, 2025, an increase of approximately $291.7 million or approximately 50%. The increase reflects new loan originations under the Bank's targeted lending initiatives, as well as continued purchases of residential and commercial real estate loans.

The following table provides the composition of the Company’s loan held for investment portfolio as of June 30, 2026 and December 31, 2025:

Commercial real estate remained the largest loan category as of June 30, 2026, comprising 55.0% of total gross loans, compared to 58.4% at December 31, 2025. Residential real estate loans increased to 22.7% 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 June 30, 2026 and December 31, 2025, SBA loans classified as commercial real estate totaled $10.4 million. SBA loans included in the commercial and industrial loan category totaled $7.6 million at June 30, 2026, compared to $8.7 million at December 31, 2025.

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As of June 30, 2026, the Company’s net loan‑to‑deposit ratio increased to 73.1% from 60.6% at December 31, 2025, while the net loan‑to‑total assets ratio increased to 66.6% 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 as of June 30, 2026 and December 31, 2025:

The following table provides the commercial real estate loan portfolio by geographic concentrations as of June 30, 2026 and December 31, 2025:

(1) Other Market consists of loans in all other states, of which California is $143.6 million as of June 30, 2026. No others are greater than 5% of the total as of the periods ending June 30,2026 and December 31, 2025.

Commercial real estate and commercial and industrial loans represented approximately 76.4% of total gross loans at June 30, 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 June 30, 2026, the Bank’s CRE concentration was 289% 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.

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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 $8.5 million at June 30, 2026, compared to $6.8 million at December 31, 2025. Based on management’s evaluation of the loan portfolio at June 30, 2026, management believed the ACL of $8.5 million, or 0.96% 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 unde

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ITEM 7. Management’s Discussion and Analysis of Financial Condition & Results of Operations

General

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.

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Critical Accounting Estimates

The Company’s consolidated financial statements are prepared in accordance with United States of America (“U.S. GAAP”) and follow general practices within the financial services industry. A summary of Patriot’s significant accounting policies is included in the Notes to consolidated financial statements that are referenced in Item 8. Financial Statements and Supplementary Data. Although all of Patriot’s policies are integral to understanding its consolidated financial statements, certain accounting policies involve management to exercise judgment, develop assumptions, and make estimates that may have a material impact on the financial information presented in the consolidated financial statements or Notes thereto. Management considers an accounting estimate to be critical if it requires assumptions that are highly uncertain at the time the estimate is made and changes in those assumptions are reasonably likely to have a material effect on the Company’s financial condition or results of operations. Management has discussed the development and selection of its critical accounting estimates with the Audit Committee. The assumptions and estimates are based on historical experience and other factors representing the best available information to management as of the date of the consolidated financial statements, up to and including the date of issuance or availability for issuance. As the basis for the assumptions and estimates incorporated in the consolidated financial statements may change, actual results could differ from those estimates.

Allowance for Credit Losses (ACL)

The Company determines its allowance for credit losses (“ACL”) under the current expected credit loss (“CECL”) methodology in ASC 326, which requires management to estimate expected credit losses over the remaining contractual life of financial assets carried at amortized cost, adjusted for expected prepayments when appropriate. The ACL is established through a provision for credit losses charged to earnings and is reduced by charge-offs, net of recoveries. The Company also maintains a reserve for unfunded lending commitments for those commitments that are not unconditionally cancellable.

The ACL is a critical accounting estimate because it requires significant management judgment and is sensitive to changes in assumptions, forecasts, and portfolio conditions. The estimate incorporates both quantitative and qualitative factors, including historical loss experience, portfolio composition, delinquency trends, internal risk ratings, nonperforming asset levels, collateral values, the financial condition of borrowers, and reasonable and supportable forecasts of macroeconomic conditions. For collateral-dependent loans, expected credit losses may depend significantly on the fair value of collateral, less estimated selling costs where applicable.

Loans that do not share similar risk characteristics with other loans are evaluated individually. For loans evaluated on a collective basis, the Company segments the portfolio by loan type and other relevant risk characteristics and applies estimation methodologies that incorporate historical loss information, current conditions, and reasonable and supportable economic forecasts. Following the forecast period, the Company reverts to historical loss information over an appropriate reversion period. Management also applies qualitative adjustments, as needed, to reflect factors not fully captured in the quantitative model.

The ACL estimate is particularly sensitive to changes in economic forecasts, borrower performance, collateral values, portfolio mix, and the credit quality of the Company’s loans. Changes in these assumptions or in the condition of the loan portfolio could result in material changes to the ACL and the related provision for credit losses in future periods.

The Company’s ACL methodology and the judgments used in determining the ACL are described more fully in the Notes to Consolidated Financial Statements included in Item 8.

FINANCIAL CONDITION

Assets

The Company’s total assets increased $75.5 million, or 7.5%, from $1.01 billion at December 31, 2024 to $1.09 billion at December 31, 2025. This was primarily reflected as a $140.2 million increase in investment securities and a $44.5 million increase in cash, cash equivalents and restricted cash, which was partially offset by a $114.4 million decline in loans receivable. The change in asset mix reflected the Company’s continued balance sheet repositioning during 2025, including reduced loan exposure, increased liquidity, and deployment of funds into investment securities.

Cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash increased $44.5 million or 27.4%, to $207.1 million as of December 31, 2025 from $162.6 million as of December 31, 2024. The increase in 2025 was primarily driven by loan repayments, loan sales, and cash proceeds from issuance of common and preferred stock. For further details, refer to the Consolidated Statements of Cash Flows.

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The higher liquidity position improved the Bank’s funding flexibility and supported the Company’s balance sheet repositioning during 2025.

Investment securities

Total investments increased $140.2 million or 166.1%, to $224.7 million at December 31, 2025 from $84.4 million at December 31, 2024. This increase primarily reflected purchases of available-for-sale securities of $145.2 million during 2025, as the Company deployed liquidity into investment securities as part of its balance sheet repositioning. The portfolio at December 31, 2025 consisted primarily of U.S. Government agency and mortgage-backed securities. During 2025, the Bank sold $4.5 million of available-for-sale securities and recognized no net gain or loss on sale, compared to sales of $8.3 million and a net loss of $334 thousand in 2024.

Loans held for investment

Gross loans receivable decreased $114.9 million, or 16.2%, to $592.6 million at December 31, 2025 from $707.5 million at December 31, 2024. The decline reflected the Company’s continued balance sheet repositioning during 2025, including restricted loan originations during the first three quarters of the year, portfolio runoff, loan sales and efforts to reduce risk and improve liquidity. The Company sold 1539 loans with an unpaid principal balance of $67.8 million during 2025. Net loans receivable decreased to $585.7 million at December 31, 2025 from $700.2 million at December 31, 2024.

The following table provides the composition of the Company’s loan held for investment portfolio as of December 31, for the years indicated:

Commercial real estate remained the largest loan category at December 31, 2025, representing 58.4% of total gross loans, compared to 59.3% at December 31, 2024. Commercial and industrial loans increased as a percentage of the portfolio to 24.8% from 18.3%, while consumer and other loans declined to 3.4% from 8.5%. SBA loans held for investment are included in the commercial real estate loans and commercial and industrial loan classifications above. As of December 31, 2025 and 2024, SBA loans included in the commercial real estate loans were $9.7 million and $18.7 million, respectively, and SBA loans included in the commercial and industrial loan were $8.7 million and $11.2 million as of December 31, 2025 and 2024, respectively.

As of December 31, 2025, the net loan-to-deposit ratio was 60.6%, compared to 72.4% at December 31, 2024, and the net loan to total assets ratio was 53.8%, compared to 69.2% at December 31, 2024. These declines reflected lower loan balances and higher deposits and liquidity during 2025.

The following table presents loans receivable, gross by portfolio segment, by contractual maturity as of December 31, 2025:

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At December 31, variable-rate loans represented 57.0% of the total loan portfolio. Approximately 30.8% of the variable-rate loan portfolio reprices within three months of a change in interest rates. The remainder of the variable-rate portfolio generally carries an initial fixed-rate period, such as one, three, or five years, followed by periodic repricing. These repricing characteristics are reflected in the Bank’s aggregate analysis of net interest sensitivity included in Item 7A.

Commercial real estate and commercial and industrial loans represented approximately 83.2% of total gross loans at December 31, 2025. 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, 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.

Allowance for Credit Losses on Loans

The Company estimates its ACL under the CECL methodology in ASC 326.

The allowance for credit losses was $6.8 million at December 31, 2025, compared to $7.3 million at December 31, 2024. Based on management’s evaluation of the loan portfolio at December 31, 2025, the ACL of $6.8 million, or 1.15% of gross loans, was considered appropriate to absorb expected credit losses in the loan portfolio as of that date.

The following table summarizes activity in the ACL:

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