Note

Business Combinations

The Company’s acquisitions are accounted for under the acquisition method of accounting in accordance with ASC

805,

Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to

one

year after the closing date of the acquisition as additional information regarding fair values becomes available.

Acquisition of Prime Bank

May 10, 2018

the Company completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT. The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut. On the acquisition date, Prime Bank had assets with a carrying value of approximately

$65

million, including investment securities with a carrying value of

$36

million, loans outstanding with a carrying value of approximately

$23

million, as well as deposits with a carrying value of approximately

$46

million. The results of Prime Bank’s operations were included in the Company’s Consolidated Statement of Income from the date of acquisition.

The acquisition will enable Patriot to expand its consumer and small business relationships, lending operations, and community presence, all of which will improve key operating metrics. The goodwill recognized results from the expected synergies and potential earnings from this combination, including some future cost savings related to the operations of Prime Bank. Patriot incurred

$632,000

acquisition costs, charged to operations during the

nine

months ended

September

30,

2018.

The assets acquired and liabilities assumed from Prime Bank were recorded at their fair value as of the closing date of the merger. Goodwill of

$2.1

million was recorded at the time of the acquisition, and was adjusted to

$1.9

million as of

September 30, 2018,

primarily due to updating of fair value of the core deposit intangibles. The goodwill is all deductible for income taxes over

years.

Patriot engaged independent consultants recognized as experts in the field of valuations and fair value measurements for acquisition and merger transactions. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Loans were evaluated on an individual basis, considering the loan’s underlying characteristics, types, remaining terms, annual interest rates, current market rates, loan to value ratios (LTV), loss exposure and remaining balances. The independent consultants utilized a discounted cash flow model to estimate the fair value of the loans using assumptions for probability of defaults, loss given defaults / recovery rates and foreclosure / recovery lags. ASC

310

Purchase Credit Impaired Loans were separately addressed with specific discount rates adjusted for an illiquidity premium.

To estimate the core deposit customer relationships intangible the consultants

first

identified the core deposits and utilized assumptions regarding the account retention rate, growth rate and float and reserve percentages. Retention rates were based on historical attrition rates based on previous transactions, the growth rate assumed

new accounts, and

increase in existing account balances, while the floats and reserve percentage assumed the market participant would most likely be subject to a reserve requirement given the current level of core deposits.

The fair value of time deposits included segmenting into certificate of deposits (“CDs”) and IRA CDs and CDs less than

$100,000

and those

$100,000

and above. The methodology entailed discounting the contractual cash flows of the instruments over their remaining contractual lives at prevailing market rates.

The following table summarizes the consideration paid by the Company in the merger with Prime Bank and the estimated fair values of the assets acquired and liabilities assumed recognized at the acquisition date and subsequent measurement period adjustments:

(In thousands)	Initially Recorded at Acquisition Date		Measurement Period Adjustments			Adjusted Values
Consideration Paid
Cash consideration	$	5,596	$	1,284		$	6,880
Contingent consideration		1,761		(1,284	)		477

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	1,152	$	-		$	1,152
Securities		35,532		-			35,532
Loans		21,605		(12	)		21,593
Premises and equipment		6		-			6
Other real estate owned		991		-			991
Core deposit intangibles		552		196			748
Other assets		1,514		-			1,514
Total assets acquired	$	61,352	$	184		$	61,536

Deposits		46,184		-			46,184
Borrowings		9,800		-			9,800
Other liabilities		111		28			139
Total liabilities assumed	$	56,095	$	28		$	56,123
Identifiable net assets acquired	$	5,257	$	156		$	5,413

Goodwill resulting from acquisition	$	2,100	$	(156	)	$	1,944

All securities acquired in the transaction with Prime Bank were sold at the fair value at acquisition date with

recorded gain or loss. Fair value adjustments to assets acquired and liabilities assumed will be amortized on a straight-line basis over periods consistent with the average useful life or contractual term of related assets and liabilities. The core deposit intangible will be amortized over a

-year period using the straight-line method.

Under the terms of the agreement, the transaction is accounted for as an asset sale. As a result, tax basis to Prime Bank is

not

carried over to Patriot and deferred tax assets on Prime Bank’s books have been written off as part of the purchase accounting adjustments.

The cash consideration is based on the initial calculation of Prime Bank tangible book value in accordance with the agreement. The initial cash payment made totaled

$5.89

million and

$1.0

million of this amount remains with the escrow agent pending resolution of the final closing tangible book value calculation.

Pursuant to a letter agreement, Patriot will make payments for up to

one

year after the acquisition date. These additional payments (contingent consideration) are to be determined based on the curing of certain loan deficiencies. On

August 29, 2018

Patriot paid

$1.28

million to the shareholders of Prime Bank pursuant to the agreement. The maximum remaining amount payable under the letter agreement is

$1.57

million and the liability under the agreement is currently estimated to be

$477,000.

This estimate has been measured based on Patriots assessment of the probability that certain loans are cured in accordance with the agreement.

The accounting for the business combination includes certain provisional amounts associated with the resolution of the purchase price consideration noted above. In addition, certain other provisional amounts have been included in the determination of the fair value of the acquired assets and liabilities and changes to those underlying estimates will be reflected as measurement period adjustments within the

one

-year measurement period. Those provisional amounts relate to the valuation of loans, other real estate owned, deposits, tax and other accrued liabilities of the acquired company.

The nature of the measurement period adjustments noted in the table above were a result of a series of payments in

August 2018

and pursuant to ongoing negotiations between the parties, and information obtained subsequent to our initial reporting of provisional fair values but prior to finalizing our fair values as of

September 30, 2018.

Such information was determined to be a condition in existence as of acquisition date. The income effects resulting from the recorded measurement period adjustments during the period ending

September 30, 2018

are immaterial for separate disclosure.

Pending Acquisition

Definitive Purchase Agreement

February 6, 2018,

the Company, Hana Small Business Lending, Inc. (“Hana SBL”), a wholly-owned subsidiary of Hana Financial, Inc. (“Hana Financial”), and

three

wholly-owned subsidiaries of Hana SBL entered into a definitive purchase agreement (“Purchase Agreement”) pursuant to which Patriot will acquire Hana SBL’s small business administration (“SBA”) lending business.

Hana SBL is a fully integrated national SBA origination and servicing platform. It has originated nearly

billion of SBA

(a) loans since its inception in

2006.

August 2, 2018,

the Company, Hana SBL and

three

wholly-owned subsidiaries of Hana SBL, entered into an amendment (the “Amendment”) to the Purchase Agreement. Pursuant to the Amendment, the closing date of the above referenced transaction has been extended from

August

2018

August

2019.

October 29, 2018

the Company withdrew its initial application to the OCC requesting approval of the acquisition. At that time, the Company entered into renewed negotiations with Hana SBL designed to restructure the terms of the pending acquisition. Those negotiations continue through the date of the filing of this report. The Company continues to pursue a transaction with Hana SBL to achieve its SBA product goals. Before the Company can complete a transaction with Hana SBL, the Company will need to obtain necessary regulatory approvals or non-objection. There is

assurance of the outcome or conditions of obtaining such approvals or non-objection, and an approval or non-objection could require material modifications of current terms of the agreement with Hana SBL. There can be

guarantee that Hana SBL will agree to any modifications of the agreement.

The Company incurred

$993,000

of merger and acquisition expenses related to the Hana SBL acquisition for the

nine

months ended

September

30,

2018.