NOTE

11.

COMMITMENTS AND CONTINGENCIES

Lease Commitments

We lease

eight

sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based on predetermined escalation schedules. Substantially all of the leases include the option to extend the lease term

one

or more times following expiration of the initial term.

The following table sets forth rent expense and rent income for the

three

months ended

March

31,

2017

and

2016

	Three Months Ended March 31,
(Amounts in thousands)	2017		2016
Rent income	$	22	$	10
Rent expense		183		145
Net rent expense	$	161	$	135

The following table sets forth, as of

March

31,

2017,

the future minimum lease payments under non-cancelable operating leases.

(Amounts in thousands)
Amounts due in:
2017	$	512
2018		619
2019		633
2020		650
2021		664
Thereafter		985
Total	$	4,063

Financial Instruments with Off-Balance Sheet Risk

Our consolidated financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of our business and involve elements of credit, liquidity, and interest rate risk. In the normal course of business, we are party to financial instruments with off-balance sheet credit risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve elements of credit and interest rate risk similar to the amounts recognized in the

Consolidated Balance Sheets

. The contract or notional amounts of these instruments reflect the extent of our involvement in particular classes of financial instruments.

The following table presents a summary of our commitments and contingent liabilities at

March

31,

2017

and

December

31,

2016.

(Amounts in thousands)	March 31, 2017		December 31, 2016
Commitments to extend credit	$	212,392	$	224,082
Standby letters of credit		2,106		1,967
Affordable housing grants		3,338		3,338
Total commitments	$	217,836	$	229,387

We were not required to perform on any financial guarantees for the

three

months ended

March

31,

2017,

and the year ended

December

31,

2016.

March

31,

2017,

approximately

$1.9

million of standby letters of credit expire within

one

year, and

$229

thousand expire thereafter.

Affordable Housing Grants

As part of satisfying our CRA responsibilities, we are a sponsor for various nonprofit organizations that receive cash grants from the Federal Home Loan Bank of San Francisco. Those grants require the nonprofit organization to comply with stipulated conditions of the grant over specified periods of time which typically vary from

years. If the nonprofit organization fails to comply, Federal Home Loan Bank of San Francisco can require us to refund the amount of the grant to Federal Home Loan Bank of San Francisco. To mitigate this contingent credit risk, Credit Administration underwrites the financial strength of the nonprofit organization and reviews their systems of internal control to determine, as best as is possible, that they will not fail to comply with the conditions of the grant.

Reserve For Unfunded Commitments

The reserve for unfunded commitments, which is included in

Other Liabilities

on the

Consolidated Balance Sheets

, was

$695

thousand at

March

31,

2017

and

December

31,

2016.

The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis, based upon changes in the amount of commitments, loss experience, and economic conditions. When necessary, the provision expense is recorded in other noninterest expense in the

Consolidated Statements of Income.

Death Benefit Agreement

The Company has entered into contracts with certain employees to pay a cash benefit to designated beneficiaries following the death of the employee. The payment will be made only if, at the time of death, the deceased employee was employed by the Bank and the Bank owned a life insurance policy on the employee’s life. Depending on specific facts and circumstances, the payment can vary from

$225,000

per employee. Neither the employees nor the designated beneficiaries have a claim against the life insurance policy on the employee’s life.

Legal Proceedings

We are involved in various pending and threatened legal actions arising in the ordinary course of business. We maintain reserves for losses from legal actions, which are both probable and estimable. In our opinion, the disposition of claims currently pending will not have a material adverse effect on our financial position or results of operations.

Concentrations of Credit Risk

We grant real estate construction, commercial, and installment loans to customers throughout northern California. In our judgment, a concentration exists in real estate related loans, which represented approximately

75%

of our gross loan portfolio at

March

31,

2017

and

December

31,

2016.

Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in our principal market areas in particular, could have an adverse impact on the repayment of these loans. Personal and business incomes, proceeds from the sale of real property, or proceeds from refinancing, represent the primary sources of repayment for a majority of these loans.

We recognize the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to other depository institutions in aggregate or to any single correspondent, we have established general standards for selecting correspondent banks as well as internal limits for allowable exposure to other depository institutions in aggregate or to any single correspondent. In addition, we have an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations with an issuer.