Note

18.

Fair Value and Interest Rate Risk

Patriot measures the carrying value of certain financial assets and liabilities at fair value, as required by its policies as a financial institution and by US GAAP. The carrying values of certain assets and liabilities are measured at fair value on a recurring basis, such as available-for-sale securities; while other assets and liabilities are measured at fair value on a non-recurring basis due to external factors requiring management’s judgment to estimate potential losses of value resulting in asset impairments or the establishment of valuation reserves. Measuring assets and liabilities at fair value

may

result in fluctuations to carrying value that have a significant impact on the results of operations or other comprehensive income for the period and period over period.

Following is a detailed summary of the guidance provided by US GAAP regarding the application of fair value measurements and Patriot’s application thereof. Additionally, the following information includes detailed summaries of the effects fair value measurements have on the carrying amounts of asset and liabilities presented in the Consolidated Financial Statements.

The objective of fair value measurement is to value an asset that

may

be sold or a liability that

may

be transferred at the estimated value which might be obtained in a transaction between unrelated parties under current market conditions.

US GAAP establishes a framework for measuring assets and liabilities at fair value, as well as certain financial instruments classified in equity. The framework provides a fair value hierarchy, which prioritizes quoted prices in active markets for identical assets and liabilities and minimizes unobservable inputs, which are inputs for which market data are not available and that are developed by management using the best information available to develop assumptions about the value market participants might place on the asset to be sold or liability to be transferred.

The

three

levels of the fair value hierarchy consist of:

Fair Value Hierarchy
Level 1	Unadjusted quoted market prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date (such as active exchange-traded equity securities and certain U.S. and government agency debt securities).

Level 2	Observable inputs other than quoted prices included in Level 1, such as: -Quoted prices for similar assets or liabilities in active markets (such as U.S. agency and government sponsored mortgage-backed securities) -Quoted prices for identical or similar assets or liabilities in less active markets (such as certain U.S. and government agency debt securities, and corporate and municipal debt securities that trade infrequently) -Other inputs that are observable for substantially the full term of the asset or liability (i.e. interest rates, yield curves, prepayment speeds, default rates, etc.).

Level 3	Valuation techniques that require unobservable inputs that are supported by little or no market activity and are significant to the fair value measurement of the asset or liability (such as pricing and discounted cash flow models that typically reflect management’s estimates of the assumptions a market participant would use in pricing the asset or liability).

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

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

The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level

These financial instruments are not recorded at fair value on a recurring basis.

Available-for-

ale

ecurities

The fair value of securities available-for-sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level

1),

matrix pricing (Level

2),

which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices, or using unobservable inputs employing various techniques and assumptions (Level

3).

Other Investments

The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund totaling

$4.5

million. This investment is utilized by the Bank to satisfy its Community Reinvestment Act (“CRA”) lending requirements. As this fund operates as a private fund, shares in the fund are not publicly traded and therefore have no readily determinable market value. The investment in the fund is reported in the Consolidated Financial Statements at cost.

Loans

For variable rate loans, which periodically reprice with no apparent change in credit risk, carrying values, adjusted for credit losses inherent in the loan portfolio, are a reasonable estimate of fair value.

The fair value of fixed rate loans is estimated by discounting the future cash flows using the period end rates, estimated by using local market data, at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the loan portfolio.

Since individual loans do not trade on an open market and transfer of individual loans are private transactions that are not publicized, the fair value of the loan portfolio is classified within Level

of the fair value hierarchy. Patriot does not record loans at fair value on a recurring basis; however, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired loans are recorded to reflect the net realizable value expected to be collected on default by the borrower based upon observable market inputs or current appraised values of collateral held. Fair values estimated in this manner do not fully incorporate an exit-price approach, but instead are based on a comparison to current market rates for comparable loans, adjusted by management based on the best information available.

Other Real Estate Owned

The fair value of OREO the Bank

may

obtain is based on current appraised property value less estimated costs to sell. When fair value is based on unadjusted current appraised value, OREO is classified within Level

of the fair value hierarchy. Patriot classifies OREO within Level

of the fair value hierarchy when unobservable inputs are used to determine adjustments to appraised values. Patriot does not record OREO at fair value on a recurring basis, but rather initially records OREO at fair value and then monitors property and market conditions that

may

indicate a change in value is warranted.

Deposits

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

The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits.

The Company does not record deposits at fair value on a recurring basis.

Senior Notes and

Junior Subordinated Debt

The senior notes were issued in

December

2016

and therefore the carrying value is considered comparable to fair value. Management does not intend to measure the senior notes at fair value on a recurring basis.

Patriot does not record Junior Subordinated Debt at fair value on a recurring basis. Junior subordinated debt reprices quarterly and, as a result, the carrying amount is considered a reasonable estimate of fair value.

Federal Home Loan Bank Borrowings

The fair value of FHLB advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances. Patriot does not record FHLB advances at fair value on a recurring basis.

Off-balance sheet

financial

instruments

Off-balance sheet financial instruments are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Patriot does not record its off-balance sheet financial instruments (i.e., commitments to extend credit) on a recurring basis.

The following tables detail the financial assets measured at fair value on a recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of

December

31,

2016

and

2015:

(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Year ended December 31, 2016:
U. S. Government agency mortgage-backed securities	$	-		10,441		-		10,441
Corporate bonds		-		8,961		-		8,961
Subordinated Notes		-		3,026		2,000		5,026

Available-for-sale securities	$	-		22,428		2,000		24,428

Year ended December 31, 2015:
U. S. Government agency mortgage-backed securities	$	-	13,413	-	13,413
Corporate bonds		-	9,010	-	9,010
U. S. Government agency bonds		-	4,954	-	4,954
Subordinated Notes		-	2,000	-	2,000

Available-for-sale securities	$	-	29,377	-	29,377

During the year ended

December

31,

2016,

a decrease in market activity was observed that resulted in the transfer of an available-for-sale subordinated note investment out of Level

and into Level

of the fair value hierarchy. Management monitors the inputs used to measure financial assets and liabilities at fair value and, when changes in circumstances occur, such as decreased volume in market activity or an absence of identical or similar financial assets or liabilities due to a change in instrument terms or features, transfers into Level

of the fair value measurement hierarchy occur.

The fair value of the subordinated note transferred into Level

during the year ended

December

31,

2016

was determined using a present value approach. The discount rate assumed was determined relative to market rates of interest and considering the history and credit worthiness of the note’s issuer. The resulting computations did not result in any change in to the fair value of the subordinated note classified as available-for-sale. Other than the subordinated note, there have been no transfers into or out of Level

of the fair value measurement hierarchy in years ended

December

31,

2016

and

2015.

Patriot measures certain financial assets and financial liabilities at fair value on a non-recurring basis. When circumstances dictate (e.g., impairment of long-lived assets, other than temporary impairment of collateral value), the carrying values of such financial assets and financial liabilities are adjusted to fair value or fair value less costs to sell, as

may

be appropriate.

The following tables detail the financial assets measured at fair value on a non-recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of

December

31,

2016

and

2015:

(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Year ended December 31, 2016:
Other real estate owned ("OREO")	$	-		-		851		851

Year ended December 31, 2015:
Impaired loans	$	-		-		363		363

Unobservable Inputs used in Fair Value Measurement - Quantitative Information
	Year ended December 31, 2016		Year ended December 31, 2015
	Other Real Estate Owned (“OREO”)		Impaired Loan s
Fair Value	$	851	$	363


Valuation technique (1)	Independent appraised value of collateral		Independent appraised value of collateral
Unobservable input (2)	Liquidation cost		Liquidation cost
Weighting of qualitative factors (3)	22.6% and (22.6)%		8% and (8)%

(1)	Fair value is generally determined through independent appraisals of the underlying property (in the case of OREO) or collateral (in the case of impaired loans).

(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3)	The weighting of qualitative factors includes items such as economic conditions (positive weight) and estimated liquidation expenses. Regarding OREO, the weighting of qualitative factors is further adjusted by a factor based on historical experience of appraised value to realized sales value, which at December 31, 2016 is a “haircut” to the weighting of 13%.

Patriot discloses fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not necessarily represent the complete underlying value of financial instruments included in the Consolidated Financial Statements.

The estimated fair value amounts have been measured as of

December

31,

2016

and

December

31,

2015

and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of the financial instruments measured

may

be different than if they had been subsequently valued.

The information presented should not be interpreted as an estimate of the total fair value of Patriot’s assets and liabilities, since only a portion of Patriot’s assets and liabilities are required to be measured at fair value for financial reporting purposes. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between Patriot’s fair value disclosures and those of other bank holding companies

may

not be meaningful.

The following table provides a comparison of the carrying amounts and estimated fair values of Patriot’s financial assets and liabilities as of

December

31,

2016

and

2015:

(In thousands)		Year ended December 31, 2016				Year ended December 31, 2015
	Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and noninterest bearing balances due from banks	Level 1	$	2,596		2,596		2,588		2,588
Interest-bearing deposits due from banks	Level 1		89,693		89,693		82,812		82,812
U. S. Government agency mortgage-backed securities	Level 2		10,441		10,441		13,413		13,413
Corporate bonds	Level 2		8,961		8,961		9,010		9,010
U. S. Government agency bonds	Level 2		-		-		4,954		4,954
Subordinated Notes	Level 2		3,026		3,026		2,000		2,000
Subordinated Notes	Level 3		2,000		2,000		-		-
Other investments	Level 2		4,450		4,450		4,450		4,450
Federal Reserve Bank stock	Level 2		2,109		2,109		2,075		2,075
Federal Home Loan Bank stock	Level 2		5,609		5,609		6,570		6,570
Loans receivable, net	Level 3		576,982		576,757		479,127		478,160
Accrued interest receivable	Level 2		2,726		2,726		2,010		2,010

Financial assets, total			708,593		708,368		609,009		608,042

Financial Liabilities:
Demand deposits	Level 2		76,772		76,772		85,797		85,797
Savings deposits	Level 2		131,429		131,429		106,291		106,291
Money market deposits	Level 2		15,593		15,593		19,508		19,508
NOW accounts	Level 2		29,912		29,912		27,951		27,951
Time deposits	Level 2		211,686		210,321		156,964		156,363
Brokered deposits	Level 1		63,932		63,897		48,154		48,062
FHLB and correspondent bank borrowings	Level 2		138,000		138,149		132,000		131,903
Senior notes	Level 2		11,628		11,628		-		-
Subordinated debentures	Level 2		8,079		8,079		8,072		8,072
Note payable	Level 3		1,769		1,565		1,954		1,904
Accrued interest payable	Level 2		118		118		532		532

Financial liabilities, total			688,918		687,463		587,223		586,383

Financial assets, net		$	19,675		20,905		21,786		21,659

The carrying amount of cash and noninterest bearing balances due from banks, interest-bearing deposits due from banks, and demand deposits approximates fair value, due to the short-term nature and high turnover of these balances. These amounts are included in the table above for informational purposes.

In the normal course of its operations, Patriot assumes interest rate risk (i.e., the risk that general interest rate levels will fluctuate). As a result, the fair value of Patriot’s financial assets and liabilities are affected when interest market rates change, which change

may

be either favorable or unfavorable. Management attempts to mitigate interest rate risk by matching the maturities of its financial assets and liabilities. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and the maturities of its financial assets and financial liabilities, adjusting the terms of new loans and deposits in an attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk through its available funds investment strategy.

Off-balance-sheet instruments

Loan commitments on which the committed interest rate is less than the current market rate were insignificant at

December

31,

2016

and

2015.

The estimated fair value of fee income on letters of credit at

December

31,

2016

and

2015

was insignificant.