Note

Fair Value and Interest Rate Risk

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A fair value hierarchy has been established that prioritizes the inputs used to measure fair value, requiring entities to maximize the use of observable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs generally require significant management judgment.

The

three

levels of the fair value hierarchy consist of:

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

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

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

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-Sale Securities

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),

or matrix pricing (Level

2),

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

3).

Other Investments

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

$4.5

million. This investment is utilized by the Bank to satisfy its Community Reinvestment Act (“CRA”) lending requirements. As this fund operates as a private fund, shares in the Fund are not publicly traded 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 portfolios, 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 portfolios.

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 on observable market inputs or current appraised value 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.

OREO

The fair value of other OREO the Bank

may

obtain is based on current appraised property value less estimated costs to sell. When the fair value is based on unadjusted current appraised values, 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.

Junior subordinated debt reprices quarterly, as a result, the carrying amount is considered a reasonable estimate of fair value. The Company does not record junior subordinated debt at fair value on a recurring basis.

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

Off-balance sheet instruments

Off-balance sheet financial instruments are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The Company does not record its off-balance-sheet instruments at fair value (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

March

31,

2017

and

December

31,

2016:

(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
March 31, 2017:
U. S. Government agency mortgage-backed securities	$	-		4,656		-		4,656
Corporate bonds		-		8,937		-		8,937
Subordinated Notes		-		5,608		2,000		7,608

Available-for-sale securities	$	-		19,201		2,000		21,201

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

As of

March

31,

2017,

there were no financial assets measured at fair value on a on a non-recurring basis.

The following tables reflect 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:

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

Unobservable Inputs used in Fair Value Measurement - Quantitative Information

	December 31, 2016
	Other Real Estate Owned (“OREO”)
Fair Value	$	851

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

(1)

Fair value is generally determined through independent appraisals of the underlying collateral (in the case of impaired loans) or property (in the case of OREO), which include Level

inputs that are not identifiable.

(2)

Appraisals

may

be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3)

The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value.

The Company 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 the

financial instruments included in the Consolidated Financial Statements

The estimated fair value amounts have been measured as of

March

31,

2017

and

December

31,

2016

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 the Company’s assets and liabilities, since only

a portion of Patriot’s assets and liabilities are 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 the Company’s 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

March

31,

2017

and

December

31,

2016:

(In thousands)		March 31, 2017				December 31, 2016
	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	$	5,087		5,087		2,596		2,596
Interest-bearing deposits due from banks	Level 1		55,179		55,179		89,693		89,693
U. S. Government agency mortgage-backed securities	Level 2		4,656		4,656		10,441		10,441
Corporate bonds	Level 2		8,937		8,937		8,961		8,961
Subordinated Notes	Level 2		5,608		5,608		3,026		3,026
Subordinated Notes	Level 3		2,000		2,000		2,000		2,000
Other investments	Level 2		4,450		4,450		4,450		4,450
Federal Reserve Bank stock	Level 2		2,358		2,358		2,109		2,109
Federal Home Loan Bank stock	Level 2		5,489		5,489		5,609		5,609
Loans receivable, net	Level 3		625,030		623,915		576,982		576,757
Accrued interest receivable	Level 2		3,063		3,063		2,726		2,726

Financial assets, total			721,857		720,742		708,593		708,368

Financial Liabilities:
Demand deposits	Level 2		78,372		78,372		76,772		76,772
Savings deposits	Level 2		140,352		140,352		131,429		131,429
Money market deposits	Level 2		15,304		15,304		15,593		15,593
NOW accounts	Level 2		26,156		26,156		29,912		29,912
Time deposits	Level 2		242,183		242,023		211,686		210,321
Brokered deposits	Level 1		58,592		58,539		63,932		63,897
FHLB and correspondent bank borrowings	Level 2		124,000		124,120		138,000		138,149
Senior notes	Level 2		11,647		11,647		11,628		11,628
Subordinated debentures	Level 2		8,080		8,080		8,079		8,079
Note payable	Level 3		1,722		1,570		1,769		1,565
Accrued interest payable	Level 2		343		343		118		118

Financial liabilities, total			706,751		706,506		688,918		687,463

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,

the Company assumes interest rate risk (the risk that general interest rate levels will change). As a result, the fair values of the Company’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 maturities of

its financial

assets and 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

March

31,

2017

and

December

31,

2016.

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

March

31,

2017

and

December

31,

2016

was insignificant.