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Fair Value and Interest Rate Risk
 6 Months Ended
Jun. 30, 2024
Fair Value Disclosures [Abstract]  
Fair Value and Interest Rate Risk 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:
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, restricted cash, and accrued interest receivable and payable
The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level 1. 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) 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, which 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 but may be redeemed with 60 days’ notice at cost. For that reason, the carrying amount was considered comparable to fair value at both June 30, 2024 and December 31, 2023 due to its short-term nature.
Federal Reserve Bank Stock and Federal Home Loan Bank Stock
Shares in the FRB and FHLB are purchased and redeemed based upon their $100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost.
Loans
The fair value of loan portfolio is estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We estimate the fair value of our loan portfolio using an exit price notion resulting in prior periods no longer being comparable. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions depending on facts and circumstances, such as origination rates, credit risk, transaction costs, liquidity, national and regional market trends and other adjustments, utilizing publicly available rates and indices. The application of an exit price notion requires the use of significant judgment.
Loans Held for Sale
The fair value of loans held for sale is estimated by using a market approach that includes prices for loans sold awaiting settlement and other observable inputs. The Company has determined that the inputs used to value the loans held for sale fall within Level 2 of the fair value hierarchy.
SBA Servicing Asset
Servicing assets do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds. Due to the significant unobservable input related to the servicing rights, the SBA servicing asset is classified within Level 3 of the valuation hierarchy.
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 2 of the fair value hierarchy. Patriot classifies OREO within Level 3 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 on a non-recurring basis and then monitors property and market conditions that may indicate a change in value is warranted.
Derivative asset (liability) - Interest Rate Swaps
The Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of interest rate swap agreements does not contain any counterparty risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy. See Note 8 for additional disclosures on derivatives.
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. Patriot does not record deposits at fair value on a recurring basis.
Senior Notes, Subordinated Notes, and Junior Subordinated Debt and Note Payable
Patriot does not record senior notes at fair value on a recurring basis. The fair value of the senior notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.
Patriot does not record subordinated notes at fair value on a recurring basis. The fair value of the subordinated notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.
Patriot does not record junior subordinated debt 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 considers its own credit worthiness in determining the fair value of its senior notes, subordinated notes, notes payable and junior subordinated debt.
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 the off-balance-sheet financial instruments (i.e., commitments to extend credit) at fair value on a recurring basis.
The following table provides a comparison of the carrying amounts and estimated fair values of Patriot’s financial assets and liabilities as of June 30, 2024 and December 31, 2023:
(In thousands)June 30, 2024December 31, 2023
Fair Value
Hierarchy 		Carrying
Amount 		Estimated
Fair Value 		Carrying
Amount 		Estimated
Fair Value
Financial Assets:
Cash and noninterest bearing balances due from banksLevel 1$2,514 $2,514 $2,195 $2,195 
Interest-bearing deposits due from banksLevel 191,097 91,097 50,322 50,322 
Restricted cashLevel 141 41 14,019 14,019 
Available-for-sale securitiesLevel 276,302 76,302 78,925 78,925 
Available-for-sale securitiesLevel 310,365 10,365 10,262 10,262 
Other investmentsLevel 24,450 4,450 4,450 4,450 
Federal Reserve Bank stockLevel 22,193 2,193 2,090 2,090 
Federal Home Loan Bank stockLevel 23,571 3,571 4,202 4,202 
Loans receivable, netLevel 3761,313 735,140 832,934 812,856 
Loans held for saleLevel 214,092 14,245 20,767 21,557 
SBA servicing assetsLevel 3790 873 857 932 
Other real estate ownedLevel 22,843 2,843 2,843 2,843 
Accrued interest receivableLevel 26,452 6,452 7,219 7,219 
Interest rate swap receivableLevel 295 95 74 74 
    
Financial assets, total$976,118 $950,181 $1,031,159 $1,011,946 
    
Financial Liabilities:    
Demand depositsLevel 2$93,736 $93,736 $110,056 $110,056 
Negotiable order of withdrawal accountsLevel 226,354 26,354 33,035 33,035 
Savings depositsLevel 239,456 39,456 44,104 44,104 
Interest bearing DDALevel 2227,253 227,253 171,577 171,577 
Money market depositsLevel 2167,836 167,836 200,280 200,280 
Time depositsLevel 2225,065 221,396 240,733 239,655 
Brokered depositsLevel 121,202 21,157 40,526 40,453 
FHLB, FRB and correspondent bank borrowingsLevel 2156,900 156,693 171,000 170,171 
Senior notesLevel 211,792 11,425 11,723 11,397 
Subordinated debtLevel 29,883 9,792 9,869 10,102 
Junior subordinated debt owed to unconsolidated trustLevel 28,142 8,142 8,137 8,137 
Note payableLevel 3270 265 376 362 
Accrued interest payableLevel 23,105 3,105 1,235 1,235 
Interest rate swap liabilityLevel 295 95 74 74 
    
Financial liabilities, total$991,089 $986,705 $1,042,725 $1,040,638 
The carrying amount of cash and noninterest bearing balances due from banks, restricted cash, interest-bearing deposits due from banks, and demand deposits approximates fair value, due to the short-term nature and high turnover of these balances. These amounts are included in the table above for informational purposes.
In the normal course of its operations, Patriot assumes interest rate risk (i.e., the risk that general interest rate levels will fluctuate). As a result, the fair value of Patriot’s financial assets and liabilities are affected when interest market rates change, which change may be either favorable or unfavorable. Management attempts to mitigate interest rate risk by matching the maturities of its financial assets and liabilities. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and the maturities of its financial assets and financial liabilities, adjusting the terms of new loans and deposits in an attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk through its available funds investment strategy.
The following tables detail the financial assets measured at fair value on a recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of June 30, 2024 and December 31, 2023:
(In thousands)Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 		Significant
Observable Inputs
(Level 2) 		Significant
Unobservable Inputs
(Level 3) 		Total
June 30, 2024:
U. S. Government agency and mortgage-backed securities$—  $64,287  $—  $64,287 
Corporate bonds—  3,518  10,365  13,883 
Subordinated notes—  4,327  —  4,327 
SBA loan pools—  3,703  —  3,703 
Municipal bonds—  467  —  467 
Available-for-sale securities$—  $76,302  $10,365  $86,667 
       
Interest rate swap receivable$—  $95  $—  $95 
       
Interest rate swap liability$—  $95  $—  $95 
December 31, 2023:
U. S. Government agency and mortgage-backed securities$—  $65,671  $—  $65,671 
Corporate bonds—  3,504  10,262  13,766 
Subordinated notes—  4,227  —  4,227 
SBA loan pools—  5,037  —  5,037 
Municipal bonds—  486  —  486 
Available-for-sale securities$—  $78,925  $10,262  $89,187 
       
Interest rate swap receivable$—  $74  $—  $74 
       
Interest rate swap liability$—  $74  $—  $74 
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.
As of June 30, 2024 and December 31, 2023, four corporate bonds were classified as Level 3 instruments. The fair values of these securities were determined using a present value approach. The discount rate assumed was determined based on unobservable inputs in a pricing model. During the three and six months ended June 30, 2024 and 2023, the Company had no transfers into or out of Levels 1, 2 or 3.
The reconciliation of the beginning and ending balances during the three and six months ended June 30, 2024 and 2023 for Level 3 available-for-sale securities is as follows:
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2024202320242023
Level 3 fair value, beginning of period$10,189 $10,205 $10,262 $9,427 
Purchases— — — — 
Realized gain (loss)— — — — 
Unrealized (loss) gain176 (323)103 455 
Transfers in and /or out of Level 3— — — — 
Level 3 fair value, end of period$10,365 $9,882 $10,365 $9,882 
The table below presents the valuation methodology and unobservable inputs for level 3 assets measured at fair value on a non-recurring basis as of June 30, 2024 and December 31, 2023:
(In thousands)Fair Value Valuation
Methodology 		Unobservable Inputs Range of Inputs
June 30, 2024:
Individually evaluated loans, net$30,173 Real Estate AppraisalsDiscount for appraisal type5.8 %-20%
   
SBA servicing assets873 Discounted Cash FlowsMarket discount rates14.73 %-14.90%
 
December 31, 2023:  
Impaired loans, net$12,928 Real Estate AppraisalsDiscount for appraisal type5.8 %-20%
 
SBA servicing assets932 Discounted Cash FlowsMarket discount rates14.73 %-14.90%
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 June 30, 2024 and December 31, 2023, 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.