NOTE

. COMMITMENTS AND CONTINGENCIES

Lease Commitments

–

We lease

nine

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 years ended

December 31, 2017

and

2016.

	December 31,
(Amounts in thousands)	2017		2016
Rent income (1)	$	46	$	78
Rent expense		841		707
Net rent expense	$	795	$	629

(

)

Rental income is derived from OREO properties

The following table sets forth, as of

December 31, 2017,

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

(Amounts in thousands)
Amounts due in:
2018	$	845
2019		866
2020		884
2021		899
2022		807
Thereafter		1,367
Total	$	5,668

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

December 31.

(Amounts in thousands)	2017		2016
Commitments to extend credit	$	217,714	$	224,082
Standby letters of credit		6,692		1,967
Affordable housing grants		3,338		3,338
Total commitments and contingent liabilities	$	227,744	$	229,387

We were

not

required to perform on any financial guarantees for the years ended

December 31, 2017

and

2016,

respectively. At

December 31, 2017,

approximately

$1.3

million of standby letters of credit expire within

one

year, and

$5.4

million expire thereafter.

Affordable Housing Grants

In fulfilling 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 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

December 31, 2017

and

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

agreements 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 amount can vary up to a maximum of

$225,000

per employee and

may

be taxable to the recipient. Neither the employee nor the designated recipient has a claim against the Bank’s 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

77%

and

75%

of our gross loan portfolio at

December 31, 2017

and

December 31, 2016,

respectively.

Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes such concentrations have

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.