12. 401(k) PLANThe <strong>Bank</strong> has a 401(k) plan in which all employees of the <strong>Bank</strong> may elect to enroll at the beginning ofeach month provided that they have been employed for at least three months prior to the enrollment date.Employees may contribute up to 15 percent of their annual salary with the <strong>Bank</strong> matching up to 3percent of the employee’s annual salary. The <strong>Bank</strong> contributed approximately $372,000 and $389,000for the years ended December 31, <strong>2006</strong> and 2005, respectively.13. COMMITMENTS AND CONTINGENCIESLeases—The <strong>Bank</strong> leases commercial office property and equipment under operating leases with termsthrough 2011, with renewal options through 2014. Future commitments on leases with a remaining termof one year or more are as follows:Year EndingDecember 312007 $ 3,225,5602008 2,981,9902009 2,543,1312010 1,252,1032011 724,286Thereafter 23,533Total $ 10,750,603Total rental expense was approximately $3,234,000 and $2,924,000 for the years ended December 31,<strong>2006</strong> and 2005, respectively.Credit-Related Financial Instruments—The <strong>Bank</strong> is a party to credit related financial instruments withoff-balance-sheet risk in the normal course of business to meet the financing needs of its customers.These financial instruments include commitments to extend credit, standby letters of credit andcommercial letters of credit. Such commitments involve, to varying degrees, elements of credit andinterest rate risk in excess of the amount recognized in the consolidated balance sheets.The <strong>Bank</strong>’s exposure to credit loss is represented by the contractual amount of these commitments. The<strong>Bank</strong> follows the same credit policies in making commitments as it does for on-balance-sheetinstruments.The following financial instruments were outstanding whose contract amounts represent credit risk atDecember 31, <strong>2006</strong>:Commitments to grant loans $ 348,032,000Unfunded commitments under lines of credit 109,728,000Commercial and standby letters of credit 30,982,000$488,742,000Commitments to extend credit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixed expiration dates or othertermination clauses and may require payment of a fee. The commitments for equity lines of credit may32
expire without being drawn upon. Therefore, the total commitment amounts do not necessarily representfuture cash requirements. The amount of collateral obtained, if it is deemed necessary by the <strong>Bank</strong>, isbased on management’s credit evaluation of the customer.Unfunded commitments under commercial lines-of-credit, revolving credit lines and overdraft protectionagreements are commitments for possible future extensions of credit to existing customers. These linesof-creditare uncollateralized and usually do not contain a specified maturity date and may not be drawnupon to the total extent to which the <strong>Bank</strong> is committed.Commercial and standby letters-of-credit are conditional commitments issued by the <strong>Bank</strong> to guaranteethe performance of a customer to a third party. Those letters-of-credit are primarily issued to supportpublic and private borrowing arrangements. Essentially all letters of credit issued have expiration dateswithin one year. The credit risk involved in issuing letters-of-credit is essentially the same as thatinvolved in extending loan facilities to customers. The <strong>Bank</strong> generally holds collateral supporting thosecommitments if deemed necessary.The reserve for losses on commitments and off balance sheet items to extend credit and letters of creditis primarily related to undisbursed funds on lines of credit. The <strong>Bank</strong>’s exposure to credit loss in theevent of non-performance by the customer is represented by the contractual amount of thoseinstruments. Consistent credit policies are used by the <strong>Bank</strong> for both on and off-balance sheet items. The<strong>Bank</strong> evaluates credit risk associated with the loan portfolio at the same time as it evaluates credit riskassociated with commitments to extend credit and letters of credits. However, the reserve necessary forthe commitments is reported separately in other liabilities in the accompanying consolidated balancesheets, and not as part of the allowance for loan losses. The reserve for losses was $1,677,000 and$1,531,000 at December 31, <strong>2006</strong> and 2005, respectively.Litigation—The <strong>Bank</strong> has been named in legal actions arising in the ordinary course of business.Management is of the opinion that the ultimate liability, if any, from these actions will not have amaterial adverse effect on its financial condition or results of operations.REGULATORY CAPITAL REQUIREMENTSThe <strong>Bank</strong> is subject to various regulatory capital requirements administered by the federal bankingagencies. Failure to meet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could have a direct effect on the <strong>Bank</strong>’sfinancial statements. Under capital adequacy guidelines and the regulatory framework for promptcorrective action, the <strong>Bank</strong> must meet specific capital guidelines that involve quantitative measures ofthe <strong>Bank</strong>’s assets, liabilities and certain off-balance-sheet items as calculated under regulatoryaccounting practices. The <strong>Bank</strong>’s capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings and other factors.The quantitative measures established by regulation to ensure capital adequacy requires the <strong>Bank</strong> tomaintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as definedin the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to averageassets (as defined). Management believes, as of December 31, <strong>2006</strong> and 2005, that the <strong>Bank</strong> meets allcapital adequacy requirements to which it is subject.As of December 31, <strong>2006</strong> and 2005, the most recent notification from the <strong>Bank</strong>’s primary regulator, theOffice of the Comptroller of the Currency, categorized the <strong>Bank</strong> as well capitalized under the regulatoryframework for prompt corrective action. To be categorized as well capitalized the <strong>Bank</strong> must maintainminimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are33
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