NOTE

FAIR VALUES

The following table presents estimated fair values of our financial instruments as of

December 31, 2017

and

2016,

whether or

not

recognized or recorded at fair value in the Consolidated Balance Sheets. The table indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value.

Non-financial assets and non-financial liabilities defined by the FASB ASC

820,

Fair Value Measurement, such as Bank premises and equipment, deferred taxes and other liabilities are excluded from the table. In addition, we have

not

disclosed the fair value of financial instruments specifically excluded from disclosure requirements of FASB ASC

825,

Financial Instruments, such as bank-owned life insurance policies.

(Amounts in thousands)	Carrying		Fair Value Measurements Using
December 31, 2017	Amounts		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	66,970	$	66,970	$	—	$	—
Securities available-for-sale	$	267,954	$	—	$	267,954	$	—
Net loans	$	869,620	$	—	$	—	$	873,660
Federal Home Loan Bank of San Francisco stock	$	4,536	$	4,536	$	—	$	—
Financial liabilities
Deposits	$	1,102,732	$	—	$	1,101,523	$	—
Term Debt	$	16,958	$	—	$	16,918	$	—
Junior subordinated debenture	$	10,310	$	—	$	10,206	$	—

(Amounts in thousands)	Carrying		Fair Value Measurements Using
December 31, 2016	Amounts		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	68,407	$	68,407	$	—	$	—
Securities available-for-sale	$	175,174	$	—	$	175,174	$	—
Securities held-to-maturity	$	31,187	$	—	$	31,374	$	—
Net loans	$	793,991	$	—	$	—	$	797,144
Federal Home Loan Bank of San Francisco stock	$	4,465	$	4,465	$	—	$	—
Financial liabilities
Deposits	$	1,004,666	$	—	$	1,004,429	$	—
Term Debt	$	18,733	$	—	$	18,726	$	—
Junior subordinated debenture	$	10,310	$	—	$	9,077	$	—

Fair Value Hierarchy

Level

valuations utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

Level

valuations utilize inputs other than quoted prices included in Level

that are observable for the asset or liability, either directly or indirectly. Level

valuations include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level

valuations are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Valuation is generated from model-based techniques that use significant assumptions

not

observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

In certain cases, the inputs used to measure fair value

may

fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.

We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value:

Cash and Cash Equivalents

– The carrying amounts reported in the

Consolidated Balance Sheet

s for cash and cash equivalents are a reasonable estimate of fair value. The carrying amount is a reasonable estimate of fair value because of the relatively short-term between the origination of the instrument and its expected realization. Therefore, we believe the measurement of fair value of cash and cash equivalents is derived from Level

inputs.

Securities

– Investment securities fair values are based on quoted market prices, where available, and are classified as Level

If quoted market prices are

not

available, fair values are estimated using quoted market prices or matrix pricing, which is a mathematical technique, used widely by the industry that relies on the securities relationship to other benchmark securities, and are classified as Level

Net Loans

– For variable rate loans that re-price frequently and with

significant change in credit risk, fair values are based on carrying values. For fixed rate loans, projected cash flows are discounted back to their present value based on specific risk adjusted spreads to the U.S. Treasury Yield Curve, with the rate determined based on the timing of the cash flows. The ALLL is considered to be a reasonable estimate of loan discount for credit quality concerns. Given that there are commercial loans with specific terms that are

not

readily available; we believe the fair value of loans is derived from Level

inputs.

Federal Home Loan Bank of San Francisco stock

–

The carrying value of Federal Home Loan Bank of San Francisco stock approximates fair value as the shares can only be redeemed by the issuing institution at par. We measure the fair value of Federal Home Loan Bank of San Francisco stock using Level

inputs.

Deposits

– We measure fair value of maturing deposits using Level

inputs. The fair values of deposits were derived by discounting their expected future cash flows based on the Federal Home Loan Bank of San Francisco yield curves, and maturities. We obtained Federal Home Loan Bank of San Francisco yield curve rates as of the measurement date, and believe these inputs fall under Level

of the fair value hierarchy. Deposits with

defined maturities, the fair values are the amounts payable on demand at the respective reporting date.

Term Debt

–

For variable rate term debt, the carrying value approximates fair value. The fair value of fixed rate term debt is estimated by discounting the future cash flows using market rates at the reporting date, of which similar debt would be issued with similar credit ratings as ours and similar remaining maturities. At

December 31, 2017,

future cash flows were discounted at

7.29%.

We measure the fair value of term debt using Level

inputs.

Junior subordinated debenture

– The fair value of the junior subordinated debenture is estimated by discounting the future cash flows using market rates at the reporting date, of which similar debentures would be issued with similar credit ratings as ours and similar remaining maturities. At

December 31, 2017,

future cash flows were discounted at

3.34%.

We measure the fair value of subordinated debentures using Level

inputs.

Commitments

– Loan commitments and standby letters of credit generate ongoing fees, which are recognized over the term of the commitment period. In situations where the borrower’s credit quality has declined, we record a reserve for these unfunded commitments. Given the uncertainty in the likelihood and timing of a commitment being drawn upon, a reasonable estimate of the fair value of these commitments is the carrying value of the related unamortized loan fees plus the reserve, which is

not

material. As such,

disclosures are made on the fair value of commitments.

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale securities are recorded at fair value on a recurring basis. From time to time, we

may

be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent impaired loans and certain other assets including OREO

, core deposit intangibles or goodwill. These nonrecurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual assets.

The following table presents information about our assets and liabilities measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value, as of

December 31

2017

and

December 31, 2016.

(Amounts in thousands)	Fair Value at December 31, 2017
Recurring Basis	Total		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. government and agencies	$	40,369	$	—	$	40,369	$	—
Obligations of states and political subdivisions		78,844		—		78,844		—
Residential mortgage-backed securities and collateralized mortgage obligations		114,592		—		114,592		—
Corporate securities		4,992		—		4,992		—
Commercial mortgage-backed securities		26,641		—		26,641		—
Other investment securities (1)		2,516		—		2,516		—
Total assets measured at fair value	$	267,954	$	—	$	267,954	$	—

(

) Principally consists of asset backed securities and CRA qualified mutual fund investments.

(Amounts in thousands)	Fair Value at December 31, 2016
Recurring Basis	Total		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. government and agencies	$	10,354	$	—	$	10,354	$	—
Obligations of states and political subdivisions		59,428		—		59,428		—
Residential mortgage-backed securities and collateralized mortgage obligations		69,604		—		69,604		—
Corporate securities		16,116		—		16,116		—
Commercial mortgage-backed securities		15,514		—		15,514		—
Other investment securities (1)		4,158		—		4,158		—
Total assets measured at fair value	$	175,174	$	—	$	175,174	$	—

(

) Principally consists of asset backed securities and CRA qualified mutual fund investments.

Recurring Items

Investment

Securities –

The available-for-sale securities amount in the recurring fair value table above represents securities that have been adjusted to their fair values. For these securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that

may

include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other things. We have determined that the source of these fair values falls within Level

of the fair value hierarchy.

Transfers Between Fair Value Hierarchy Levels

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer. There were

transfers between levels of the fair value hierarchy during the years ended

December 31, 2017

2016.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

may

be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. The following

three

tables present information about our assets and liabilities at

December 31, 2017

and

December 31, 2016

measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period.

The amounts disclosed below present the fair values at the time the nonrecurring fair value measurements were made, and

not

necessarily the fair values as of the date reported upon.

(Amounts in thousands)	Fair Value at December 31, 2017
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	60	$	—	$	—	$	60
Other real estate owned		35		—		—		35
Total assets measured at fair value	$	95	$	—	$	—	$	95

(Amounts in thousands)	Fair Value at December 31, 2016
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	1,587	$	—	$	—	$	1,587
Other real estate owned		219		—		—		219
Total assets measured at fair value	$	1,806	$	—	$	—	$	1,806

The following table presents the losses resulting from nonrecurring fair value adjustments for the

years ended

December 31, 2017,

2016

and

2015

related to assets outstanding at

December 31, 2017,

2016,

and

2015.

(Amounts in thousands)	December 31,
Fair value adjustments	2017		2016		2015
Collateral dependent impaired loans	$	20	$	1,183	$	476
Other real estate owned		38		77		197
Total	$	58	$	1,260	$	673

For the year ended

December 31,

2017

collateral dependent impaired loans with a carrying amount of

$80

thousand were written down to their fair value of

$60

thousand resulting in a

$20

thousand adjustment to the ALLL.

For the year ended

December 31, 2017,

one

property is included in the OREO balance with an aggregate carrying value of

$73

thousand that was written down to fair value of

$35

thousand, resulting in a

$38

thousand adjustment to ALLL.

The loan amounts above represent impaired, collateral dependent loans that have been adjusted to fair value during the respective reporting period. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL.

The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral less estimated selling costs. The carrying value of loans fully charged off is

zero

. When the fair value of the collateral is based on a current appraised value, or management determines the fair value of the collateral is further impaired below the appraised value and there is

observable market price, we record the impaired loan as nonrecurring Level

The OREO amount above represents impaired real estate that has been adjusted to fair value during the respective reporting period. The loss represents impairments on OREO for fair value adjustments based on the fair value of the real estate. The determination of fair value is based on recent appraisals of the foreclosed properties, which take into account recent sales prices adjusted for unobservable inputs, such as opinions provided by local real estate brokers and other real estate experts. OREO fair values are adjusted for estimated selling costs between

and

34%.

We record OREO as a nonrecurring Level

Limitations

– Fair value estimates are made at a specific point in time, based on relevant market information and other information about the financial instrument. These estimates do

not

reflect any premium or discount that could result from offering for sale at

one

time, our entire holdings of a particular financial instrument. Because

market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on current on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are

not

considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have

not

been considered in any of the estimates.