NOTE

20.

FAIR VALUES

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

December 31, 2018

and

2017,

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. The prior period fair values for loans disclosed are

not

determined in a manner consistent with the current period fair values disclosed because of a change in the methodology due to the adoption of ASU

2016

as described in Note

Summary of Significant Accounting Policies

in these

Notes to Consolidated Financial Statements

(Amounts in thousands)	Carrying		Fair Value Measurements Using
December 31, 2018	Amounts		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	47,365	$	47,365	$	—	$	—
Securities available-for-sale	$	256,928	$	—	$	256,928	$	—
Net loans	$	935,886	$	—	$	—	$	936,697
Federal Home Loan Bank of San Francisco stock	$	5,892	$	5,892	$	—	$	—
Financial liabilities
Deposits	$	1,131,716	$	—	$	1,129,795	$	—
Term Debt	$	13,405	$	—	$	13,323	$	—
Junior subordinated debenture	$	10,310	$	—	$	14,183	$	—

(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	$	266,943	$	—	$	266,943	$	—
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	$	—

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 tables present 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, 2018

and

December 31, 2017.

(Amounts in thousands)	Fair Value at December 31, 2018
Recurring Basis	Total		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. government and agencies	$	40,087	$	—	$	40,087	$	—
Obligations of states and political subdivisions		50,530		—		50,530		—
Residential mortgage-backed securities and collateralized mortgage obligations		138,503		—		138,503		—
Corporate securities		2,922		—		2,922		—
Commercial mortgage-backed securities		24,762		—		24,762		—
Other investment securities		124		—		124		—
Total assets measured at fair value	$	256,928	$	—	$	256,928	$	—

(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		1,505		—		1,505		—
Total assets measured at fair value	$	266,943	$	—	$	266,943	$	—

Recurring Items

Debt 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, 2018

2017.

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 tables present information about our assets and liabilities at

December 31, 2018

and

December 31, 2017

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, 2018
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Other real estate owned	$	31	$	—	$	—	$	31
Total assets measured at fair value	$	31	$	—	$	—	$	31

(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

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

December 31, 2018,

2017

and

2016

related to assets outstanding at

December 31, 2018,

2017,

and

2016.

(Amounts in thousands)	December 31,
Fair value adjustments	2018		2017		2016
Collateral dependent impaired loans	$	—	$	20	$	1,183
Other real estate owned		21		38		77
Total	$	21	$	58	$	1,260

For the year ended

December 31, 2018,

one

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

$52

thousand that was written down to fair value of

$31

thousand, resulting in a

$21

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 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 that are based off the adjusted fair value are

42%

for the remaining properties in OREO. We record OREO as a nonrecurring Level

fair value.

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.