NOTE

FAIR VALUES

The following tables present estimated fair values of our financial instruments as of

March 31, 2020

and

December 31, 2019,

whether or

not

recognized or recorded at fair value in the

Consolidated Balance Sheets

. The tables indicate 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
March 31, 2020	Amounts		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	43,940	$	43,940	$	—	$	—
Securities available-for-sale	$	285,077	$	—	$	285,077	$	—
Net loans	$	1,039,307	$	—	$	—	$	1,051,561
Federal Home Loan Bank of San Francisco stock	$	7,380	$	7,380	$	—	$	—
Financial liabilities
Deposits	$	1,242,387	$	—	$	1,244,030	$	—
Term debt	$	19,969	$	—	$	20,272	$	—
Junior subordinated debenture	$	10,310	$	—	$	11,614	$	—

(Amounts in thousands)	Carrying		Fair Value Measurements Using
December 31, 2019	Amounts		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	80,604	$	80,604	$	—	$	—
Securities available-for-sale	$	286,950	$	—	$	286,950	$	—
Net loans	$	1,022,834	$	—	$	—	$	1,025,520
Federal Home Loan Bank of San Francisco stock	$	7,380	$	7,380	$	—	$	—
Financial liabilities
Deposits	$	1,267,171	$	—	$	1,267,153	$	—
Term debt	$	9,957	$	—	$	10,006	$	—
Junior subordinated debenture	$	10,310	$	—	$	13,471	$	—

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 table below presents the range and weighted average of significant unobservable inputs used to calculate Level

fair value of our loan portfolio using a discounted cash flows at

March 31, 2020.

Quantitative Information about Level 3 Fair Value Measurements
Unobservable Inputs	Range (Weighted Average)
Probability of Default (PD)		0.51%	-	100%	-	(1.72%)
Loss Given Default (LGD)		0%	-	77.42%		(18.72%)
Prepayment Rate		0%	-	34.47%	-	(20.79%)
Discount Rate		3.33%	-	9.08% -	-	(4.82%)

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.

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

March 31, 2020

and

December 31, 2019.

(Amounts in thousands)	Fair Value at March 31, 2020
Recurring Basis	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
U.S. government and agencies	$	36,043	$	—	$	36,043	$	—
Obligations of state and political subdivisions		63,263		—		63,263		—
Residential mortgage-backed securities and collateralized mortgage obligations		160,439		—		160,439		—
Corporate securities		2,983		—		2,983		—
Commercial mortgage-backed securities		17,428		—		17,428		—
Other asset-backed securities		4,921		—		4,921		—
Total assets measured at fair value	$	285,077	$	—	$	285,077	$	—

(Amounts in thousands)	Fair Value at December 31, 2019
Recurring Basis	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
U.S. government and agencies	$	38,733	$	—	$	38,733	$	—
Obligations of state and political subdivisions		42,098		—		42,098		—
Residential mortgage-backed securities and collateralized mortgage obligations		180,835		—		180,835		—
Corporate securities		2,966		—		2,966		—
Commercial mortgage-backed securities		19,307		—		19,307		—
Other asset-backed securities		3,011		—		3,011		—
Total assets measured at fair value	$	286,950	$	—	$	286,950	$	—

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

three

months ended

March 31, 2020

or the year ended

December 31, 2019.

Nonrecurring items

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.

Collateral Dependent Loans -

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. When the fair value of the collateral is based on an appraisal or other estimate and there is

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

fair value. Impaired loan valuations are adjusted for estimated selling costs ranging from

10%

based off the adjusted fair value of the property.

OREO -

The OREO amounts below represent 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 of

52%

based off the adjusted fair value of the property. We record OREO as a nonrecurring Level

fair value.

The following tables present information about our assets at

March 31, 2020

and

December 31, 2019

measured at fair value on a nonrecurring basis for which a nonrecurring fair value adjustment 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 March 31, 2020
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Other real estate owned	$	8	$	—	$	—	$	8
Total assets measured at fair value	$	8	$	—	$	—	$	8

(Amounts in thousands)	Fair Value at December 31, 2019
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	33	$	—	$	—	$	33
Other real estate owned		35		—		—		35
Total assets measured at fair value	$	68	$	—	$	—	$	68

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

three

months ended

March 31, 2020

and

2019

related to assets outstanding at

March 31, 2020

and

2019.

(Amounts in thousands)	Three Months Ended March 31,
Fair value adjustments	2020		2019
Other real estate owned	$	6	$	68
Total	$	6	$	68

During the

three

months ended

March 31, 2020,

one

loan with an aggregate carrying value of

$14

thousand was written down to its fair value of

thousand, resulting in a

thousand adjustment to the ALLL when the underlying property was transferred to OREO.

During the

three

months ended

March 31, 2019,

four

loans with an aggregate carrying value of

$102

thousand were written down to their fair value of

$34

thousand, resulting in a

$68

thousand adjustment to the ALLL when the underlying properties were transferred to OREO.

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.

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 only on current on and off-balance sheet financial instruments. Our fair value estimates do

not

include any adjustment for anticipated future business. 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.