2009 ANNUAL REPORT
BANK OF GUAM
®
CORPORATE
INFORMATION
ANNUAL MEETING
The 2010 annual meeting of stockholders will be held at
7:00 P.M. on Monday, May 3, 2010, in the Bank’s Hagåtña
Branch in its Headquarters Building.
BANK OF GUAM® HEADQUARTERS
111 Chalan Santo Papa
Hagåtña, Guam 96910
4ELs&AX
www.bankofguam.com
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
361 South Marine Corps Drive
Tamuning, Guam 96913-3911
4ELs&AX
www.deloitte.com
TAX CONSULTANT
Robert J. Steffy, C.P.A.
!RCHBISHOP&LORES3TREETs3UITE
Hagåtña, Guam 96910
4ELs&AX
GENERAL COUNSEL
Arriola, Cowan & Arriola
-ARTYR3TREETs3UITE
Hagåtña, Guam 96910
4ELs&AX
STOCKS
%FFECTIVE &EBRUARY #OMPUTERSHARE 4RUST #OMPANY
N.A. (“Computershare”) is now the Registrar, Stock Transfer
and Dividend Disbursing Agent for Bank of Guam’s common
stock, with duties that include: stock transfers, dividend payments, address changes and lost certificate replacements.
Computershare Trust Company, N.A.
for written requests, please write to:
Computershare Shareholder Services
0/"OXs0ROVIDENCE2)
for written requests, by overnight delivery:
Computershare Shareholder Services
250 Royall Street
Canton, MA 02021
Tel: (888) 835-5678 (U.S., Canada, Puerto Rico & Guam)
Tel: (312) 360-5193 (non U.S.)
www.computershare.com/investor
The shares of the Bank are now traded privately among individual stockholders, investors, and in the over-the-counter
market. The stock prices of such trades vary with each transaction.
OTHER FINANCIAL SERVICES
Bank of Guam® Trust Services*
(EADQUARTERS"UILDINGsTH&LOOR
111 Chalan Santo Papa
Hagåtña, Guam 96910
4ELs&AX
"'7EALTH-ANAGEMENT3ERVICES
-ONEY#ONCEPTS)NC®
(EADQUARTERS"UILDINGsTH&LOOR
111 Chalan Santo Papa
Hagåtña, Guam 96910
4ELs&AX
"ANK'UAM)NSURANCE5NDERWRITERS,TD
(EADQUARTERS"UILDINGsST&LOOR
111 Chalan Santo Papa
Hagåtña, Guam 96910
4ELs&AX
MEMBER
&EDERAL$EPOSIT)NSURANCE#ORPORATION
American Bankers Association
Guam Bankers Association
California Bankers Association
7ESTERN)NDEPENDENT"ANKERS!SSOCIATION
Western States Card Services
Saipan Bankers Association
GOVERNMENT SUPERVISION
&EDERAL$EPOSIT)NSURANCE#ORPORATION
Guam Banking Commission
California Superintendent of Banks
#OMMONWEALTHOFTHE.ORTHERN-ARIANA)SLANDS
Department of Commerce
&EDERATED3TATESOF-ICRONESIA"ANKING"OARD
2EPUBLICOF0ALAU&INANCIAL)NSTITUTIONS#OMMISSION
2EPUBLICOFTHE-ARSHALL)SLANDS"ANKING#OMMISSION
*Investment, trust and insurance services offered by Bank of Guam are (1) not insured by the Federal Deposit Insurance Corporation, any government
agency, or any other deposit insurance program; (2) not deposits with, obligations of, or guaranteed by Bank of Guam; and (3) subject to investment risk,
including possible loss of the principal amount invested.
CONTENTS
Corporate Information .......................................... Inside Cover
Message to Stockholders ...................................................... 2
Corporate Highlights .............................................................. 4
Independent Auditors’ Report .............................................. 7
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................................ 31
Senior Management, Headquarters &
Branch Officials ................................................................... 42
Board of Directors ................................................................. 43
FINANCIAL HIGHLIGHTS
[$ in thousands, except per share data]
At December 31st
2009
2008
Change in
Amount
Change in
%
2007
Total assets
Total deposits
Net loans
Reserve for loan losses
Investment securities
Stockholders’ equity
Net income
$
$
$
$
$
$
$
940,572
811,894
550,297
8,895
278,891
80,895
5,501
$
$
$
$
$
$
$
858,277
739,663
515,168
9,943
211,537
81,014
6,209
$
$
$
$
$
$
$
82,295
72,231
35,129
(1,048)
67,354
(119)
(708)
9.6%
9.8%
6.8%
(10.5%)
31.8%
(0.1%)
(11.4%)
$
$
$
$
$
$
$
829,282
736,164
445,842
9,000
289,014
78,564
8,488
Cash dividends declared: common stock
$
4,328
$
4,312
$
16
0.4%
$
6,222
PER SHARE
Net income per share - basic
Net income per share - diluted
$
$
0.63
0.62
$
$
0.72
0.70
$
$
(0.09)
(0.08)
(12.5%)
(11.4%)
$
$
0.99
0.96
Cash dividends declared: common stock
$
0.50
$
0.50
$
-
0.0%
$
0.73
Book value per share
(8,702 and 8,668 shares issued and 8,669 and 8,636
shares outstanding at 2009 and 2008, respectively)
$
9.33
$
9.38
$
(0.05)
(0.5%)
$
9.13
CASH DIVIDENDS DECLARED PER QUARTER
2009 Stock
2008 Stock
1st Qtr.
$
$
0.125
0.125
2nd Qtr.
$
$
0.125
0.125
3rd Qtr.
$
$
0.125
0.125
4th Qtr.
$
$
0.125
0.125
Total/Yr.
$
$
0.500
0.500
MESSAGE TO
STOCKHOLDERS
Buenas yan Hafa Adai! )TISHARDTOBELIEVETHATANOTHERYEARHAS
PASSEDSOQUICKLY)TISALSOHARDTOBELIEVETHATSOMANYCHANGESIN'UAM
our neighboring islands, the United States and the entire world, have taken
PLACESINCE)GREETEDYOUINLASTYEARS!NNUAL2EPORT4HENEARCOLLAPSEOF
global financial markets in late 2008 led directly to a severe international
RECESSIONFROMWHICHONLYAFEWNATIONSHAVESTARTEDTORECOVER&ORTUNATELY
THEBRUNTOFTHEDOWNTURNINECONOMICACTIVITYDIDNOTAFFECT"ANKOF'UAMSMARKETSEXCEPTTHROUGHITSIMPACTONTOURism. Nonetheless, the islands in our region continue to suffer from a prolonged period of stagnation, with their economic
performance being essentially flat-to-declining over the past several years.
While the economies in our market area were not seriously damaged by the global recession, the Bank was affected by the
53GOVERNMENTSRESPONSETOTHEFINANCIALCRISIS3INCELATETHE&EDERAL2ESERVEHASBEENMAINTAININGATARGETRANGE
FORTHE&ED&UNDSRATETHEINTERESTRATEATWHICHBANKSLOANFUNDSTOEACHOTHEROVERNIGHTOFTO4HISINTURN
has caused the lowest short-term market interest rates in history, and these low rates have put downward pressure on the
financial community’s ability to earn our accustomed level of net interest on our loan and investment portfolios. Although
these pressures appear to be easing modestly, it may be a long time before net interest earnings return to normal.
%VENINTHECHALLENGINGCONDITIONSUNDERWHICH"ANKOF'UAMOPERATEDINWEWEREABLETOEXPANDOURASSETBASEBY
MILLIONCLOSINGTHEYEARATMILLION(OWEVERINPARTBECAUSEOFLOWERINTERESTRATEMARGINSOURREVENUES
COULDNOTKEEPUPWITHOURINCREASEDEXPENSESWHICHWEREDRIVENUPWARDBYHIGHERCOMPLIANCECOSTSTHEEXPANSIONOFOUR
BRANCHNETWORKANDGENERALIZEDINFLATION"ANKOF'UAMSNETINCOMEFORWASMILLIONOFFFROMTHEPREVIOUSYEAR/URRATEOFRETURNONASSETSWASDOWNFROMINANDOURRATEOFRETURNONEQUITYWAS
DOWNFROMAYEAREARLIER!LTHOUGHWEMADEEVERYEFFORTTOBRINGINHIGHERRETURNSTHESEFIGURESSTILLCOMPAREFAVORABLYTOOURPEERGROUPS2/!OFAND2/%OFOURPEERGROUPCONSISTSOFBANKSHAVINGBETWEENBILLIONAND
$3 billion in average assets during the fourth quarter).
Our net income during 2009 allowed Bank of Guam to continue paying regular, quarterly dividends that totaled $4.3 million
during the year. However, we re-value our available-for-sale securities every quarter, and a marginal increase in interest
rates toward the end of the year forced us to adjust stockholders’ equity downward due to an unrealized loss on those secuRITIESOFMILLION!LTHOUGHTHE"ANKDOESNOTEXPECTTHESELOSSESTOBEREALIZEDINTHEORDINARYCOURSEOFBUSINESSTHE
ACCOUNTINGPROCEDURELEDTOASLIGHTREDUCTIONINTOTALEQUITYFORTHEYEAR
2
*USTASOURTOTALDEPOSITSGREWBYMILLIONTOCLOSETHEYEARATMILLIONOURTOTALLOANSALSOGREWEVEN
in the difficult economic environment that we faced. By the end of 2009, our total loan portfolio stood at $559.2 million,
UPFROMTHEYEARBEFORE"YCATEGORYCOMMERCIALLOANSINCREASEDBYTOMILLIONCONSUMERLOANSGREW
BYTOMILLIONTHEREALESTATELOANSTHATWERETAINONOURBOOKSRATHERTHANSELLINGTOTHE&EDERAL(OME,OAN
-ORTGAGE#ORPORATIONOROTHERSINCREASEDBYTOMILLIONINCONTRASTOURLOANSTOGOVERNMENTSDECREASEDBY
TOMILLIONANDOUROTHERLOANSFELLBYTOMILLION/URCOMMERCIALLENDINGPRIMARILYTOSMALLBUSInesses because of the nature of our markets, provides clear evidence that we support the economic health and growth of our
islands, and allowed Bank of Guam to be the local Small Business Administration lender in Guam for the past several quarters. Our mortgage lending and consumer loans show that we continue to support the personal aspirations of the people of
Micronesia by assisting them in buying their own homes, taking care of their medical needs, paying for their education and
INVESTMENTINHUMANCAPITALANDINNUMERABLEOTHERGOALS)NALLOFTHISTHOUGHWECONTINUETOFOLLOWOURSTRINGENTCREDIT
underwriting standards. Bank of Guam remains safe and sound.
As we meet the credit needs of the communities we serve, we continue the pursuit of our vision: to be recognized as the
PREMIERFINANCIALINSTITUTIONINTHE7ESTERN0ACIFICDELIVERINGEXCEPTIONALSERVICEANDVALUETOOURCUSTOMERSEMPLOYEES
ANDSTOCKHOLDERS)NFURTHERANCEOFTHISVISIONWEENTEREDTWONEWGEOGRAPHICMARKETSDURINGOPENINGBRANCHES
IN9APAND+OSRAE3TATESINTHE&EDERATED3TATESOF-ICRONESIAANDBRINGINGOURFULLRANGEOFBANKINGANDOTHERFINANCIAL
SERVICESTOTHOSETWOPOPULATIONS7EALSOENHANCEDOUREXISTINGCREDITCARDPROGRAMBYPARTNERINGWITH$ELTA!IRLINESSO
THATOUR6)3!CARDHOLDERSCANNOWEARN$ELTA3KY-ILESPOINTSEVERYTIMETHEYUSETHEIRCARDS
Bank of Guam continues to select, hire and train highly qualified, competent employees to serve our customers and conDUCTOUROPERATIONS/URTRAININGPROGRAMSHAVEBECOMESOEXTENSIVEANDWIDELYAVAILABLETHATMANYSTAFFMEMBERSHAVE
mentioned them as one of the key benefits they receive through their employment with us. Despite our austere budgetary
allocations during recent years, we continue to offer a broad and deep range of bank-related education through on-line and
INHOUSETRAININGWEALSOPROVIDETUITIONASSISTANCETOANYOFOUREMPLOYEESWHOCHOOSETOPURSUEAHIGHEREDUCATION
provided that their coursework is related to the skills that our organization requires.
As always, we strive to provide an ever-increasing level of value to you, our stockholders. We believe that this goes beyond
the regular payment of dividends, that it becomes more than continuing to increase the share value of your stock. We
BELIEVETHATITEXTENDSALLTHEWAYTOGENERATINGACERTAINPRIDEOFOWNERSHIPIN"ANKOF'UAM)NLINEWITHTHATWEAREACTIVE
AS"ANKEMPLOYEESANDASINDIVIDUALSINEACHOFTHECOMMUNITIESWESERVEWEAREGENEROUSINOURGIVINGINCLUDINGOUR
employees’ tireless efforts to raise substantial contributions for the American Cancer Society and the American Red Cross,
among other organizations. We hold ourselves to the highest standards in preserving and improving the public image that
we have earned over the years, and we do everything within our power to make you proud that you are a part of the Bank
of Guam family.
!S)WRITETHIS)AMCAUTIOUSLYOPTIMISTICABOUTTHEFUTUREOFTHEREGIONALECONOMIES&ORTHEPASTSEVERALMONTHSWEHAVE
been seeing rising numbers of visitor arrivals and increased activity in our tourism industry. After a long spell of weakness, we are also seeing higher activity in the construction industry, which has historically been the driving force behind
Guam’s business cycle. While these improvements are not yet large, they are nonetheless positive indications of what we can
EXPECTINTHENEARTERM7EAREALSOANTICIPATINGAMILITARYBUILDUPIN'UAMDURINGTHENEXTSEVERALYEARS!LTHOUGHTHERE
REMAINSAGREATDEALOFUNCERTAINTYREGARDINGTHERELOCATIONOF-ARINESFROM/KINAWATO'UAMWEARESTILLEXPECTINGSOME
LEVELOFEXPANSIONANDWITHBRANCHESONBOTHOFTHEISLANDSMAINMILITARYBASESWEAREWELLPOSITIONEDTOTAKEADVANTAGE
of the opportunities that arise. We are, though, concerned about several elements of the proposed actions, including their
environmental impacts, and will continue to work with both local and federal officials to find solutions before problems
develop.
Looking forward, my main objective for 2010 is to improve the quality and performance of Bank of Guam’s earning assets.
7EWILLCONTINUETOBEAGGRESSIVEINOURLENDINGACTIVITIESWITHINTHELIMITSOFPRUDENCEANDWEWILLEMPHASIZETHEEXTENSION
of credit to the people and communities we serve so as to improve the quality of life in this region and accelerate economic
development.
/N BEHALF OF THE MANAGEMENT AND STAFF OF "ANK OF 'UAM ) WANT TO EXPRESS MY SINCERE HEARTFELT GRATITUDE TO YOU OUR
STOCKHOLDERSFORYOURCONTINUEDCONFIDENCEANDSUPPORT)UNDERSTANDTHATTHEPASTSEVERALYEARSHAVEBEENDIFFICULTBUT
WITHYOURTRUSTANDTHEENCOURAGEMENTTHATYOUPROVIDETOALLOFUS)AMCERTAINTHATOUR"ANKWILLCONTINUETOGROWAND
to thrive in the future.
Si Yu´os Ma´asé,
Lourdes (Lou) A. Leon Guerrero
PRESIDENT, CEO
AND
CHAIR
OF THE
BOARD
3
CORPORATE HIGHLIGHTS
Yap
Branch
Grand
Opening
Celebration
(BELOW, LEFT TO RIGHT)
Bank of Guam’s
Mike Naholowaa (Vice President/
FSM, RMI & Palau Regional
Manager), Lou Leon Guerrero
(President, CEO and Chair of the
Board), and Steven Alcantara (Assistant Vice President/Yap Branch
Manager).
TO RIGHT) Bank of Guam® Yap Branch Grand Opening Ribbon Cutting Ceremony: Steven Alcantara (Bank of Guam® Assistant Vice President/
Yap Branch Manger), Lou Leon Guerrero (Bank of Guam® President, Chief
Executive Officer and Chair of the Board), &AUSTINO9ANGMOG(Chairman of
the Board, YCA Corporation, Landlord), Speaker Charles Chieng (Yap Legislature), The Honorable Sebastion Anefal (Governor of Yap), and Pastor Asael
Ruda (Yap Evangelical Church).
(ABOVE, LEFT
Kosrae
Branch
Grand
Opening
Celebration
Bank of Guam® Kosrae Branch Grand Opening Ribbon Cutting Ceremony: Gerardo Protacio (Kosrae Catholic
Church Lay Minister),&RANCES,'"ORJA (Bank of Guam® Board of Directors), Mary Simmering (Assistant Vice President/
Kosrae Branch Manger), William Tosie (Kosrae Lt. Governor), Johnston Taulung (Mayor, Tafunsak Village),-ANNIX#RUZ
(Owner & Landlord, Capital Building), Senator Lyndon H. Jackson (Speaker of the 9th Kosrae State Legislature), The Honorable Robert Weilbacher (Governor of Kosrae), and Lou Leon Guerrero (Bank of Guam® President, Chief Executive Officer and
Chair of the Board).
(LEFT TO RIGHT)
4
Bank of Guam®
and Delta Air Lines
Co-Brand
Partnership
Bank of Guam and Delta Air Lines…
(ABOVE) Lou Leon Guerrero (Bank of Guam® President, CEO
and Chair of the Board), proudly displays the new Northwest
(now Delta) Visa® Credit Card with Richard Parsons (Delta Air
Lines).
(LEFT) Bank of Guam® and Delta Air Lines (formerly Northwest Airirlines) enter into historic co-brand partnership, introducing the
he
new Bank of Guam®/Delta SkyMiles® Visa Credit Card.
Ms. Racine Manley,
Bank of Guam®
employee and
2009 Miss Universe
Guam.
Guam Quarter Introduction and Distribution…
(LEFT) U.S. Mint Director Ed Moy deposits a Guam Quarter into a Bank off
Guam® Carabank at the Guam Quarter Launch at Skinner Plaza.
(BOTTOM) Guam families get Guam Quarters from Bank of Guam® staffers.
5
CORPORATE HIGHLIGHTS
Team Ifit… 2009 ACS Relay for Life Team
Bank of Guam® has consistently been a fundraising leader for the American Cancer Society’s “Relay for Life.” The Bank’s team is photographed
during the 2009 Guam Relay.
Bank of Guam SBA Nominees Win Awards…
(LEFT TO RIGHT) Bank of
6
Guam® officials photographed with the 2009 Small Business Administration (SBA) Winners nominated by the Bank…
Kebrina Duenas (Bank of Guam Marketing Officer), Lou Leon Guerrero (Bank of Guam President, CEO and Chair of the Board), James Honda
(2009 SBA Small Business Exporter of the Year), Paul Tobiason (2009 SBA Home-Based Business Champion), Emilio Uy (2009 SBA Small
Business Person of the Year), Craig R. Wade (2009 SBA Financial Services Champion & Bank of Guam® Vice President), Joey Crisostomo (2006
SBA Small Business Person of the Year & Bank of Guam® Board Member), and Jackie Marati (Bank of Guam® Senior Vice President/Marketing
Administrator).
Deloitte & Touche LLP
361 South Marine Corps Drive
Tamuning, GU 96913-3911
USA
Tel: (671)646-3884
Fax: (671)649-4932
www.deloitte.com
Independent Auditors' Report
To the Board of Directors and
Shareholders of the Bank of Guam:
We have audited the accompanying consolidated statements of condition of the Bank of Guam and
subsidiaries (the “Bank”) as of December 31, 2009 and 2008, and the related consolidated statements of
income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three
years ended December 31, 2009. These financial statements are the responsibility of the Bank’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Bank's internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of the Bank of Guam and subsidiaries as of December 31, 2009 and 2008 and the
results of their operations and their cash flows for each of the three years in the period ended December
31, 2009 in conformity with accounting principles generally accepted in the United States of America.
February 23, 2010
Deloitte & Touche Audit Report
Member of
Deloitte Touche Tohmatsu
7
[In thousands, except par value]
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
2009
2008
Assets
Cash and due from banks
Federal funds sold
Interest bearing deposits in banks
Total cash and cash equivalents
Interest bearing deposits in banks
Investment securities available for sale
Investment securities held to maturity
Federal Home Loan Bank stock, at cost
Loans, net of allowance for loan losses
(2009: $8,895 and 2008: $9,943)
Accrued interest receivable
Premises and equipment, net
Goodwill
Other assets
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Accrued interest payable
Federal funds purchased
FHLB advances
Other liabilities
Total liabilities
$ 25,748
20,588
$ 28,070
55,000
5,021
46,336
88,091
6,150
238,198
38,495
2,198
5,154
160,729
48,610
2,198
550,297
5,457
20,639
783
32,019
515,168
4,133
22,571
783
10,840
$ 940,572
$ 858,277
$ 213,292
598,602
$ 205,333
534,330
811,894
739,663
418
10,000
35,000
2,365
972
35,000
1,628
859,677
777,263
1,820
13,357
67,789
(1,781)
1,813
13,097
66,616
(222)
81,185
(290)
81,304
(290)
80,895
81,014
$ 940,572
$ 858,277
Commitments and contingencies
Deloitte & Touche Audit Report
Stockholders’ equity:
Common stock $0.2083 par value; 48,000 shares authorized;
8,702 and 8,668 shares issued and 8,669 and 8,636
shares outstanding at 2009 and 2008, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Common stock in treasury, at cost (32 shares)
Total stockholders’ equity
8
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[In thousands, except per share amounts]
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2008
2007
$ 40,572
8,529
46
477
$ 37,413
11,568
636
404
$ 39,571
12,671
1,602
425
49,624
50,021
54,269
1,692
6,228
1,105
4,640
4,022
1,181
7,055
4,843
524
9,025
9,843
12,422
40,599
40,178
41,847
2,550
2,400
929
38,049
37,778
40,918
4,265
7,889
3,854
6,864
4,103
5,883
12,154
10,718
9,986
18,839
5,673
5,505
12,757
18,047
5,740
4,885
11,206
17,419
5,288
4,481
11,606
Total non-interest expenses
42,774
39,878
38,794
Income before income taxes
7,429
8,618
12,110
1,928
2,409
3,622
Interest income:
Loans
Investment securities
Federal funds sold
Deposits with banks
Total interest income
Interest expense:
Time deposits
Savings deposits
Other borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income, after provision for loan losses
Non-interest income:
Service charges and fees
Other income
Total non-interest income
Non-interest expenses:
Salaries and employee benefits
Occupancy
Furniture and equipment
General, administrative and other
Income tax expense
Net income
Earnings per share:
Basic
Diluted
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
$
5,501
$
6,209
$
8,488
$
0.63
$
0.72
$
0.99
$
0.62
$
0.70
$
0.96
Deloitte & Touche Audit Report
2009
9
[In thousands]
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
2009
2008
2007
Net income
$
Other comprehensive loss, net of tax effects:
Unrealized holding (loss) gain on available-for-sale securities
arising during the period
Reclassification for gains realized on available-for-sale
securities during the period
Amortization of unrealized holding loss on held-to-maturity
securities during the period
Total other comprehensive (loss) income
Comprehensive income
$
5,501
$
6,209
$
8,488
(4,407)
(1,240)
795
2,718
1,430
75
130
93
106
(1,559)
283
976
3,942
$
6,492
$
9,464
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
Years Ended December 31,
2009
2008
2007
Deloitte & Touche Audit Report
Common stock:
Balance at beginning of year (8,668, 8,634 and 8,599 shares,
respectively)
Common stock issued to employees
(34, 34 and 35 shares issued, respectively)
10
$
Balance at end of year (8,702, 8,668 and 8,634 shares, respectively)
Additional paid-in capital:
Balance at beginning of year
Common stock issued to employees
Balance at end of year
Common stock in treasury
Balance at beginning of year
Purchase of common stock (32 shares)
Balance at end of year
Accumulated other comprehensive loss:
Balance at beginning of year
Change in unrealized loss on securities available for sale,
net of reclassification adjustment and tax effects
Change in unrealized loss on securities held to maturity,
net of reclassification adjustment and tax effects
Balance at end of year
Retained earnings:
Balance at beginning of year
Net income
Cash dividends declared
Balance at end of year
Total stockholders’ equity
1,813
$
1,801
$
1,792
7
12
9
1,820
1,813
1,801
13,097
260
13,357
12,839
258
13,097
12,595
244
12,839
(290)
(290)
(290)
(290)
(290)
(290)
(222)
(505)
(1,481)
(1,689)
190
870
130
(1,781)
93
(222)
106
(505)
66,616
5,501
(4,328)
67,789
$ 80,895
64,719
6,209
(4,312)
66,616
$ 81,014
62,453
8,488
(6,222)
64,719
$ 78,564
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[In thousands]
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2009
2008
2007
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses
Depreciation and amortization
Amortization of fees, discounts and premiums
Writedown and loss on sales of foreclosed assets
(Increase) decrease in mortgage servicing rights
Realized gain on sale of available-for-sale securities
Loss on disposal of premises and equipment
Net change in:
Accrued interest receivable
Other assets
Accrued interest payable
Other liabilities
$
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Net change in interest bearing deposits with banks
Purchases of securities available for sale
Proceeds from sales of securities available for sale
Maturities, prepayments and calls of securities available for sale
Maturities, prepayments and calls of securities held to maturity
Loan originations and principal collections, net
Proceeds from sales of loans
Proceeds from sales of foreclosed real estate
Proceeds from sales of premises and equipment
Additions to premises and equipment
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net increase in deposits
Payment of FHLB advances
Proceeds from FHLB advances
Proceeds from Federal funds purchased
Proceeds from issuance of common stock
Dividends paid
Net cash provided by financing activities
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Supplemental schedule of noncash investing and financing activities:
Foreclosed assets transferred from loans, net
Transfer of foreclosed assets to loans
Sale of premises and equipment through bank financing
Transfer of bank shares in satisfaction of a loan receivable
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
$
6,209
$
8,488
2,550
3,250
1,857
(58)
(246)
(2,718)
-
2,400
3,064
(38)
46
2
(1,450)
28
929
2,527
(2,056)
164
(175)
(75)
108
(1,324)
(16,500)
(554)
737
307
2,676
(977)
(977)
152
(188)
343
(632)
(7,505)
11,290
9,585
(996)
(451,913)
261,204
111,999
9,851
(66,534)
25,119
168
(1,318)
5,000
(484,049)
156,805
395,174
11,468
(89,375)
18,493
193
65
(2,815)
(10,154)
(514,846)
33,441
438,227
12,265
(45,478)
12,863
406
(2,225)
(112,420)
10,959
(75,501)
72,231
(15,000)
15,000
10,000
267
(4,328)
3,499
25,000
270
(4,312)
41,877
(5,000)
5,000
253
(6,222)
78,170
24,457
35,908
(41,755)
88,091
46,706
41,385
(30,008)
71,393
$
46,336
$
88,091
$
41,385
$
9,579
1,528
$
10,820
1,877
$
12,079
5,518
$
3,862
(126)
-
$
225
(484)
585
-
$
118
(92)
290
Deloitte & Touche Audit Report
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
5,501
11
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Basis of
Presentation
The consolidated financial statements include the accounts
of the Bank of Guam (the Bank) and wholly-owned subsidIARIES"ANK'UAM0ROPERTIES)NCAND"ANK'UAM)NSURANCE
Underwriters, Ltd. All significant intercompany and interbranch balances and transactions have been eliminated in
consolidation.
Assets held by the Bank’s Trust department in a fiduciary
capacity are not assets of the Bank, and, accordingly, are not
included in the accompanying consolidated financial statements.
Deloitte & Touche Audit Report
Business
The Bank provides a variety of financial services to individuals, businesses and governments through its branches. The
Bank’s headquarters is located in Hagatna, Guam and it
operates branches located on Guam, the Commonwealth of
THE.ORTHERN-ARIANA)SLANDS#.-)THE&EDERATED3TATES
OF -ICRONESIA &3- THE 2EPUBLIC OF THE -ARSHALL )SLANDS
2-)THE2EPUBLICOF0ALAU2/0ANDTHE5NITED3TATESOF
America. The Bank currently has twelve branches in Guam,
THREEINTHE#.-)FOURINTHE&3-ONEINTHE2-)ONEIN
0ALAUANDONEIN3AN&RANCISCO)TSPRIMARYDEPOSITPRODUCTS
are demand deposits, savings and term certificate accounts
and its primary lending products are consumer, commercial
and real estate loans.
12
Risks and Uncertainties
)NTHENORMALCOURSEOFITSBUSINESSTHE"ANKENCOUNTERSTWO
significant types of risks: economic and regulatory. There are
three main components of economic risk: interest rate risk,
credit risk and market risk. The Bank is subject to interest
rate risk to the degree that its interest-bearing liabilities
mature or re-price at different speeds, or on a different basis,
THAN ITS INTERESTEARNING ASSETS )NCORPORATED INTO INTEREST
rate risk is prepayment risk. Prepayment risk is the risk
associated with the prepayment of assets, and the write-off of
premiums associated with those assets, if any, should interest rates fall significantly. Credit risk is the risk of default,
primarily in the Bank’s loan portfolio that results from the
borrower’s inability or unwillingness to make contractually
required payments. Market risk reflects changes in the value
of securities, the value of collateral underlying loans receivable and valuation of real estate owned. Credit and market
risks can be affected by a concentration of business in the
Pacific Rim and California, United States of America.
The Bank is subject to the regulations of various government agencies. These regulations may change significantly
from period to period. Such regulations can also restrict the
growth of the Bank as a result of capital requirements. The
"ANK ALSO UNDERGOES PERIODIC EXAMINATIONS BY THE REGULA-
tory agencies, which may subject it to further changes with
respect to asset valuations, amounts of required loss allowances and operating restrictions. Such changes may result
from the regulators’ judgments based on information availABLETOTHEMATTHETIMEOFTHEIREXAMINATION
Use of Estimates
The preparation of consolidated financial statements in
accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income
AND EXPENSES DURING THE PERIODS PRESENTED !CTUAL RESULTS
could differ from those estimates. Material estimates that
are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan
losses, valuation of real estate owned, other-than-temporary
impairment of securities, and the fair value of financial
instruments.
Significant Group Concentration of
Credit Risk
Most of the Bank’s activities are with customers located
WITHIN 'UAM #.-) &3- 2-) 2/0 AND #ALIFORNIA 53
The types of securities that the Bank invests in are included
in note 3. The types of lending that the Bank engages in are
included in note 4. The Bank does not have any significant
concentrations to any one industry or customer.
Cash and Cash Equivalents
&OR PURPOSES OF THE CONSOLIDATED STATEMENTS OF CASH FLOWS
cash and cash equivalents include cash on hand and balances
due from banks, federal funds sold, and interest bearing
deposits with banks, all of which mature within ninety days.
4HE"ANKISREQUIREDBYTHE&EDERAL2ESERVE3YSTEMTOMAINtain cash reserves against certain of their deposit accounts.
At December 31, 2009 and 2008, the required combined
RESERVESTOTALEDAPPROXIMATELYANDRESPECtively.
Interest Bearing Deposits with Banks
)NTERESTBEARINGDEPOSITSWITHBANKSMATUREWITHINONEYEAR
and are carried at cost.
Investment Securities
Certain debt securities that management has the positive
intent and ability to hold to maturity are classified as “held
to maturity” and are recorded at amortized cost. Trading
securities are recorded at fair value with changes in fair
value included in earnings. Securities not classified as held
to maturity or trading, including equity securities with readily determinable fair value, are classified as “available for
sale” and are recorded at fair value, with unrealized gains
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 1: Summary of Significant Accounting Policies, Continued…)
…Investment Securities, Continued
and LOSSES EXCLUDED FROM EARNINGS AND REPORTED IN OTHER
comprehensive income. Purchase premiums and discounts
are recognized in interest income using the straight-line
METHODWHICHAPPROXIMATESTHEINTERESTYIELDMETHODOVER
the terms of the securities. Gains and losses on the sale of
securities are recorded on the trade date and are determined
using the specific identification method.
4HE&INANCIAL!CCOUNTING3TANDARDS"OARD&!3"RECENTLY
issued accounting guidance related to the recognition and
presentation of other-than-temporary impairment (“Pending
#ONTENTvOF&!3"!CCOUNTING3TANDARDS#ODIFICATIONh&!3"
ASC” 320-10). See note 2 Recent Accounting Pronouncements
for additional information.
Prior to the adoption of the recent accounting guidance on
January 1, 2010, management considered, in determining
WHETHER OTHERTHANTEMPORARY IMPAIRMENT EXISTS THE
LENGTHOFTIMEANDTHEEXTENTTOWHICHTHEFAIRVALUEHASBEEN
less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the
Bank to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
&OR EQUITY SECURITIES WHEN THE "ANK HAS DECIDED TO SELL AN
impaired available-for-sale security and the entity does not
EXPECT THE FAIR VALUE OF THE SECURITY TO FULLY RECOVER BEFORE
THEEXPECTEDTIMEOFSALETHESECURITYISDEEMEDOTHERTHAN
temporarily impaired in the period in which the decision to
sell is made. The Bank recognizes an impairment loss when
the impairment is deemed other-than-temporary even if a
decision to sell has not been made.
Management evaluates securities for other-than-temporary
impairment on an annual basis, and more frequently when
economic or market concerns warrant such evaluation.
Loans
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off generally
)NTERESTINCOMEISACCRUEDONTHEUNPAIDPRINCIPALBALANCE
Loan origination fees, net of certain direct origination costs,
are deferred and recognized in income using the straight-line
method over the contractual life of the loans. Differences
between this method and the interest method are not significant and do not otherwise materially affect the accompanying
consolidated financial statements.
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days past due unless
the credit is well-secured and in process of collection. Credit
card loans and other unsecured consumer loans are typically
charged off no later than 180 days past due. Past due status
ISBASEDONCONTRACTUALTERMSOFTHELOAN)NALLCASESLOANS
are placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed
on nonaccrual or charged off are reversed against interest
income. The interest on these loans is accounted for on
the cash-basis or cost-recovery method, until qualifying
for return to accrual. Loans are returned to accrual status
when all the principal and interest amounts contractually
due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the
allowance when management believes the uncollectability of
a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a quarterly
basis by management and is based upon management’s
periodic review of the collectability of the loan in light of hisTORICALEXPERIENCETHENATUREOFVOLUMEOFTHELOANPORTFOLIO
adverse situations that may affect the borrower’s ability to
repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components.
The allocated component relates to loans that are classified as
IMPAIRED&ORTHOSELOANSTHATARECLASSIFIEDASIMPAIREDAN
allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired
loan is lower than the carrying value of the loan. The general
component covers unimpaired loans and is based on hisTORICALCHARGEOFFEXPERIENCEANDEXPECTEDLOSSGIVENDEFAULT
Deloitte & Touche Audit Report
Federal Home Loan Bank Stock
4HE "ANK AS A MEMBER OF THE &EDERAL (OME ,OAN "ANK
&(,"3EATTLESYSTEMISREQUIREDTOMAINTAINANINVESTMENT
INCAPITALSTOCKOFTHE&(,""ASEDONTHEREDEMPTIONPROVISIONS OF THE &(," THE STOCK HAS NON QUOTED MARKET VALUE
ANDISCARRIEDATCOST)N$ECEMBERTHE&(,"DECLARED
a moratorium on the redemption of its stock. At its discreTIONTHE&(,"MAYDECLAREDIVIDENDSONTHESTOCK(OWEVER
INTHE&(,"SUSPENDEDITSFIRSTQUARTERDIVIDENDS
and disclosed that dividends for the remainder of 2009 are
unlikely. Management reviews for impairment based on the
ULTIMATE RECOVERABILITY OF THE COST BASIS OF THE &(," STOCK
The primary factor supporting the carrying value is the
COMMITMENT OF &(," TO PERFORM ITS OBLIGATIONS INCLUDING
providing credit and other services to the Bank.
are reported at their outstanding unpaid principal balances
adjusted for charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
13
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 1: Summary of Significant Accounting Policies, Continued…)
…Allowance for Loan Losses, Continued
derived from the Bank’s internal risk rating process. Other
adjustments may be made to the allowance for pools of loans
AFTER AN ASSESSMENT OF INTERNAL OR EXTERNAL INFLUENCES ON
credit quality that are not fully reflected in the historical loss
or risk rating data.
A loan is considered impaired when, based on current information and events, it is possible that the Bank will be unable
to collect the scheduled payments of principal and interest
when due according to the contractual terms of the loan
AGREEMENT&ACTORSCONSIDEREDBYMANAGEMENTINDETERMINing impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest
PAYMENTSWHENDUE,OANSTHATEXPERIENCEINSIGNIFICANTPAYment delays and payment shortfalls generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower’s prior
payment record, and the amount of the shortfall in relation
TOTHEPRINCIPALANDINTERESTOWED)MPAIRMENTISMEASURED
on a loan by loan basis for commercial and real estate loans
BYEITHERTHEPRESENTVALUEOFEXPECTEDFUTURECASHFLOWSDIScounted at the loan’s effective interest rate, the loans’ obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large group of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank
does not separately identify individual consumer loans for
impairment disclosures.
Deloitte & Touche Audit Report
Off-Balance Sheet Financial Instruments
)N THE ORDINARY COURSE OF BUSINESS THE "ANK HAS ENTERED
INTOCOMMITMENTSTOEXTENDCREDITINCLUDINGCOMMITMENTS
under credit card arrangements, commercial letters of credit
and standby letters of credit. Such financial instruments are
recorded when they are funded.
14
Loans Held for Sale and Mortgage
Servicing Rights (MSR)
Mortgage loans originated and intended for sale in the
SECONDARY MARKET ARE CARRIED AT COST WHICH APPROXIMATES
market value. Gains and losses are recognized upon the sale
of loans.
Mortgage servicing assets are recognized separately when
rights are acquired through sale of mortgage loans. Under the
SERVICINGASSETSANDLIABILITIESACCOUNTINGGUIDANCEIN&!3"
!3#&!3"!3#SERVICINGRIGHTSRESULTINGFROMTHE
sale of loans originated by the Bank are initially measured
at fair value at the date of transfer. The Bank subsequently
measures each class of servicing asset using either the fair
value or the amortization method. The Bank has elected to
initially and subsequently measure the mortgage servicing
rights for mortgage loans using the fair value method. Under
the fair value method, the servicing rights are carried in the
statements of condition at fair value and the changes in fair
value are reported in earnings in the period in which the
changes occur.
&AIR VALUE IS BASED ON A VALUATION MODEL THAT CALCULATES
the present value of estimated future net servicing income.
The valuation model incorporates assumptions that market
participants would use in estimating future net servicing
income, such as the cost to service, the discount rate, the
custodial earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses. These variables change from period to period as market conditions and
projected interest rates change, and may have an adverse
impact on the value of the mortgage servicing right and may
result in a reduction to noninterest income.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on contractual percentage of
the outstanding principal and are recorded as income when
earned. The change in fair value of mortgage servicing rights
is netted against loan servicing fee income.
Premises and Equipment
Premises and equipment are reported at cost, less accumulated depreciation and amortization. Depreciation and
amortization are computed on the straight-line method over
the estimated useful lives of the related assets. Depreciation
EXPENSEHASBEENCOMPUTEDPRINCIPALLYUSINGESTIMATEDLIVES
of 15 to 40 years for premises and 5 to 10 years for furniture
and equipment. Leasehold improvements are depreciated
OVERTHEESTIMATEDLIVESOFTHEASSETSORTHEEXPECTEDTERMS
OFTHELEASESIFSHORTER%XPECTEDTERMSINCLUDELEASEOPTION
PERIODSTOTHEEXTENTTHATTHEEXERCISEOFSUCHOPTIONSISREAsonably assured.
Construction-in-progress consists of accumulated direct and
indirect costs associated with the Bank’s construction of
premises and the purchase of equipment which have not
been placed in service and, accordingly, have not been
subjected to depreciation. Such assets are depreciated over
their estimated useful lives when completed and placed in
service.
Foreclosed Assets
Properties acquired through, or in lieu of, loan foreclosure
are held for sale and are initially recorded at the lower of the
carrying amount of the loan or the fair value of the property
reduced by estimated selling costs. Subsequent to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of carrying amount or
fair value less cost to sell. A valuation allowance is increased
by provisions charged to earnings. Subsequent write-down,
INCOME AND EXPENSE INCURRED IN CONNECTION WITH HOLDING
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 1: Summary of Significant Accounting Policies, Continued…)
…Foreclosed Assets, Continued
such assets, and gains and losses realized from the sales of
such assets are charged to the valuation allowance.
UPON EXAMINATION 4HE TERM MORE LIKELY THAN NOT MEANS
A LIKELIHOOD OF MORE THAN PERCENT THE TERMS EXAMINED
ANDUPONEXAMINATIONALSOINCLUDERESOLUTIONOFTHERELATED
appeals or litigation processes, if any.
Goodwill
Goodwill is deemed to have an indefinite life and is not amortized but is tested at least annually for impairment in accorDANCEWITH&!3"!3#Intangibles – Goodwill and Other.
…Earnings Per Common Share, Continued
Earnings per common share have been computed based on reported net income and the following share data:
2009
2008
2007
Average number of common shares outstanding
Effect of dilutive options
8,681
234
8,642
226
8,615
216
Average number of common shares outstanding
used to calculate diluted earnings per common share
8,915
8,868
8,831
Deloitte & Touche Audit Report
! TAX POSITION THAT MEETS THE MORELIKELYTHANNOT RECOGNItion threshold is initially and subsequently measured as the
LARGEST AMOUNT THAT THE TAX AUTHORITY HAS FULL KNOWLEDGE OF
all relevant information. The determination of whether or not
Treasury Stock
A TAX POSITION HAS MET THE MORELIKELYTHANNOT RECOGNITION
Common stock shares repurchased are recorded as treasury threshold considers the facts, circumstances, and information
stock at cost.
available at the reporting date and is subject to management’s
JUDGMENT $EFERRED TAX ASSETS ARE REDUCED BY A VALUATION
Income Taxes
)NCOME TAXES REPRESENT TAXES RECOGNIZED UNDER LAWS OF THE allowance if, based on the weight of evidence available, it is
Government of Guam, which generally conform to U.S. income MORELIKELYTHANNOTTHATSOMEPORTIONORALLOFADEFERREDTAX
TAXLAWS&OREIGNINCOMETAXESRESULTFROMPAYMENTSOFTAXES asset will not be realized.
WITHEFFECTIVERATESRANGINGFROMTOOFGROSSINCOME 4HE"ANKRECOGNIZESINTERESTANDPENALTIESONINCOMETAXESAS
OF THE #OMMONWEALTH OF THE .ORTHERN -ARIANA )SLANDS THE ACOMPONENTOFINCOMETAXEXPENSE
&3-THE2-)AND0ALAUTOTHEIRRESPECTIVEGOVERNMENTJURISDividends Declared
DICTIONS53&EDERALAND#ALIFORNIAINCOMETAXESHAVEBEEN
At its discretion, the Bank declares dividends to stockholdREFLECTEDASFOREIGNTAXESFORFINANCIALREPORTINGPURPOSES
ers of record as of the declaration date. The Bank declared
4HE "ANK ACCOUNTS FOR INCOME TAXES IN ACCORDANCE WITH and paid dividends of $0.125 per each share of common
INCOME TAX ACCOUNTING GUIDANCE &!3" !3# Income stock outstanding for each of the quarters in 2009 and 2008.
Taxes). On January 1, 2009, the Bank adopted the recent )N &EBRUARY A SPECIAL DIVIDEND OF CENTS WAS
accounting guidance related to accounting for uncertainty declared and paid.
IN INCOME TAXES WHICH SETS OUT A CONSISTENT FRAMEWORK TO
Comprehensive Income
DETERMINETHEAPPROPRIATELEVELOFTAXRESERVESTOMAINTAINFOR
Comprehensive income consists of net income and other comUNCERTAINTAXPOSITIONS
prehensive income. Other comprehensive income includes
4HE INCOME TAX ACCOUNTING GUIDANCE RESULTS IN TWO COMPO- unrealized gains on securities available for sale and unrealized
NENTSOFINCOMETAXEXPENSECURRENTANDDEFERRED#URRENT losses related to factors other than credit on debt securities,
INCOMETAXEXPENSEREFLECTSTAXESTOBEPAIDFORTHEPERIODBY which are also recognized as separate components of equity.
APPLYINGTHEPROVISIONSOFTHEENACTEDTAXLAWTOTHETAXABLE
Earnings Per Common Share
INCOME 4HE "ANK DETERMINES DEFERRED INCOME TAXES USING
Basic earnings per share represent income available to comthe liability (or balance sheet) method. Under this method,
mon stockholders divided by the weighted-average number of
THENETDEFERREDTAXASSETORLIABILITYISBASEDONTHETAXEFFECTS
common shares outstanding during the period. Diluted earnOF THE DIFFERENCES BETWEEN THE BOOK AND TAX BASES OF ASSETS
ings per share reflect additional common shares that would
ANDLIABILITIESANDENACTEDCHANGESINTAXRATESANDLAWSARE
have been outstanding if dilutive potential common shares
recognized in the period in which they occur.
had been issued, as well as any adjustment to income that
$EFERREDINCOMETAXEXPENSERESULTSFROMCHANGESINDEFERRED would result from the assumed issuance. Potential common
TAXASSETSANDLIABILITIESBETWEENPERIODS$EFERREDTAXASSETS shares that may be issued by the Bank relate solely to outare recognized if it is more likely than not, based on the tech- standing stock options, and are determined using the treasury
NICALMERITSTHATTHETAXPOSITIONWILLBEREALIZEDORSUSTAINED stock method.
15
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 1: Summary of Significant Accounting Policies, Continued…)
Fair Value of Financial Instruments
&AIRVALUESOFFINANCIALINSTRUMENTSAREESTIMATEDUSINGRELevant market information and other assumptions, as more
FULLYDISCLOSEDINNOTE&AIRVALUEESTIMATESINVOLVEUNCERtainties and matters of significant judgment. Changes in
assumptions or in market condition could significantly affect
the estimates.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the
assets have been isolated from the Bank – put presumptively
beyond the reach of the transferor and its creditors, even in
bankruptcy or other receivership, (2) the transferee obtains
the right (free of conditions that constrain it from taking
ADVANTAGEOFTHATRIGHTTOPLEDGEOREXCHANGETHETRANSFERRED
assets, and (3) the Bank does not maintain effective control
over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally
cause the holder to return specific assets.
Advertising Costs
!DVERTISINGCOSTSAREEXPENSEDASINCURRED
Subsequent Events
Management has considered subsequent events through
&EBRUARY UPON WHICH THE CONSOLIDATED FINANCIAL
statements were available to be issued.
Note 2 - Recent Accounting Pronouncements
Deloitte & Touche Audit Report
FASB Accounting Standards Codification
Effectively July 1, 2009, the Bank adopted new accounting
GUIDANCE RELATED TO 53 '!!0 &!3" !3# Generally
Accepted Accounting Principles). This guidance establishes
&!3" !3# AS THE SOURCE OF AUTHORITATIVE 53 '!!0 RECOGNIZED BY &!3" TO BE APPLIED BY NONGOVERNMENTAL ENTITIES
&!3" !3# SUPERSEDES ALL EXISTING NON3%# 3ECURITY AND
%XCHANGE#OMMISSIONACCOUNTINGANDREPORTINGSTANDARDS
All other nongrandfathered, non-SEC accounting literature
NOT INCLUDED IN &!3" !3# HAS BECOME NONAUTHORITATIVE
&!3" WILL NO LONGER ISSUE NEW STANDARDS IN THE FORM OF
3TATEMENTS &!3" 3TAFF 0OSITIONS OR %MERGING )SSUES 4ASK
&ORCE !BSTRACTS )NSTEAD IT WILL ISSUE !CCOUNTING 3TANDARDS
5PDATES!35SWHICHWILLSERVETOUPDATE&!3"!3#PROvide background information about the guidance and provide
THEBASISFORCONCLUSIONSONTHECHANGESTO&!3"!3#&!3"
ASC is not intended to change U.S GAAP. This guidance is
effective for the Bank as of December 31, 2009.
16
current guidance by specifying that (1) if an entity does not
have the intent to sell a debt security prior to recovery and (2)
it is more likely than not that it will not have to sell the debt
security prior to loss. When an entity does not intend to sell
the security, and it is more likely than not, the entity will not
have to sell the security before recovery of its cost basis, it will
recognize the credit component of an other-than-temporary
impairment of a debt security in earnings and the remaining
PORTIONINOTHERCOMPREHENSIVEINCOME&ORHELDTOMATURITY
DEBT SECURITIES THE AMOUNT OF AN /44) RECORDED IN OTHER
comprehensive income for the noncredit portion of a previOUS/44)SHOULDBEAMORTIZEDPROSPECTIVELYOVERTHEREMAINing life of the security on the basis of the timing and future
estimated cash flows of the security. This guidance is effective
for the Bank as of January 1, 2010. Management believes that
the adoption of this Statement will not have any impact on the
Bank’s financial position or results of operations.
Measuring Fair Value When Market
Activity Declines
)N !PRIL THE &!3" ISSUED &30 &!3 CODIFIED IN
ASC 820-10), which provides guidance on (1) estimating the
fair value of an asset or liability (financial and nonfinancial)
when the volume and level of activity for the asset or liability
have significantly decreased and (2) identifying transactions
that are not orderly. The guidance emphasizes that fair value
is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction. This emphasis
reinforces that fair value is a current market-based measurement and not an entity-specific or hypothetical future.
This guidance is effective for the Bank as of January 1, 2010.
Other-Than-Temporary Impairment
Management believes that the adoption of this Statement
)N!PRILTHE&!3"ISSUED&!3"3TAFF0OSITION&30&!3
will not have any impact on the Bank’s financial position or
AND &!3 CODIFIED IN !3# RELATED
results of operations.
to recognition and presentation of other-than-temporary
IMPAIRMENT/44)4HISRECENTACCOUNTINGGUIDANCEAMENDS Transfer of Financial Assets
THERECOGNITIONGUIDANCEFOR/44)LOSSESONDEBTANDEQUITY )N *UNE THE &!3" ISSUED ACCOUNTING GUIDANCE &!3"
SECURITIES )T REPLACED THE hINTENT AND ABILITYv INDICATION IN Statement No. 166) which modifies certain guidance conFair Value Measurements and Disclosures
The Bank adopted accounting guidance related to fair value
MEASUREMENTS AND DISCLOSURES &!3" !3# Fair Value
Measurements and Disclosures). This guidance defines fair
value, establishes a framework for measuring fair value and
EXPANDS DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS 4HIS
guidance establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions
about risk and the effect of a restriction on the sale or use
of an asset. At adoption, there was no impact on the Bank’s
financial position or results of operations.
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 2: Recent Accounting Pronouncements, Continued…)
…Transfer of Financial Assets, Continued
to accounting for transfers of financial assets and required
additional disclosures. This guidance is effective for the Bank
tained in the Transfers and ServicingTOPICOF&!3"!3#&!3"
as of January 1, 2010. Management believes that the adopASC 860). This standard eliminates the concept of qualifytion of this Statement will not have any impact on the Bank’s
ing special purpose entities, provides guidance as to when a
financial position or results of operations.
portion of a transferred financial asset can be evaluated for
sale accounting, provides additional guidance with regard
Note 3 - Investment Securities
The amortized cost and fair value of investment securities, with gross unrealized gains and losses, follows:
2009
Securities Available for Sale
Municipal Bonds
U.S. government agency pool securities
U.S. government agency or Government
Sponsored Enterprises (GSE)
Securities Held to Maturity
U.S. government agency pool securities
U.S. government agency or GSE
mortgage-backed securities
Gross
Gross
Amortized Unrealized Unrealized
Fair
Cost
Gains
Losses
Value
$ 11,693
$
74
$
(77) $ 11,690
88,477
229
(473)
88,233
139,683
50
(1,458)
138,275
$ 238,198
$ 239,853
$
353
$
(2,008)
$
$
-
$
(69)
3,458
35,037
$
38,495
1,200
$
1,200
$
(3)
$
(72)
3,389
36,234
$
39,623
2008
Securities Available for Sale
U.S. Treasury obligations
Municipal Bonds
U.S. government agency pool securities
U.S. government agency or GSE
mortgage-backed securities
85,817
1,670
-
87,487
$ 160,729
$ 159,824
$
1,970
$
(1,065)
$
$
-
$
(145)
4,037
44,573
$
48,610
250
$
250
$
(97)
$
(242)
3,892
44,726
$
48,618
At December 31, 2009 and 2008, investment securities with a carrying value of $160,006 and $86,277, respectively, were
pledged to secure various Government deposits and other public requirements.
Deloitte & Touche Audit Report
Securities Held to Maturity
U.S. government agency pool securities
U.S. government agency or GSE
mortgage-backed securities
Gross
Gross
Amortized Unrealized Unrealized
Fair
Cost
Gains
Losses
Value
$
2,245
$
5
$
$
2,250
22,509
43
(635)
21,917
49,253
252
(430)
49,075
17
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 3: Investment Securities, Continued…)
The amortized cost and fair value of investment securities by contractual maturity at December 31, 2009, follows:
Available for Sale
Amortized
Cost
Due within one year
Due after five but within ten years
Due after ten years
$
29
2,604
9,060
Held to Maturity
Fair
Value
$
29
2,642
9,019
11,693
88,477
139,683
11,690
88,233
138,275
$ 239,853
$ 238,198
U.S. government agency pool securities
Mortgage-backed securities
Amortized
Cost
$
-
Fair
Value
$
3,458
35,037
$
38,495
3,389
36,234
$
39,263
&OR THE YEAR ENDED $ECEMBER AND PROCEEDS FROM SALES OF AVAILABLEFORSALE SECURITIES AMOUNTED TO
ANDRESPECTIVELYGROSSREALIZEDGAINSWEREANDRESPECTIVELYGROSSUNREALIZED
losses were $266, $215 and $139, respectively.
Temporarily Impaired Securities
The following table shows the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are
not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized losses position at December 31, 2009.
2009
Securities Available for Sale
Municipal bonds
U.S. government agency pool securities
U.S. government agency or GSE
mortgage-backed securities
Securities Held to Maturity
U.S. government agency or GSE
mortgage-backed securities
Less Than Twelve Months
Over Twelve Months
Unrealized
Fair
Loss
Value
$
8
$
2,779
272
22,500
Unrealized
Fair
Loss
Value
$
69
$
3,575
201
15,393
1,458
129,736
-
$
1,738
$ 155,015
$
270
$
18,968
$
-
$
$
72
$
3,306
-
-
Deloitte & Touche Audit Report
2008
Securities Available for Sale
Municipal bonds
U.S. government agency pool securities
Securities Held to Maturity
U.S. government agency pool securities
U.S. government agency or GSE
mortgage-backed securities
Less Than Twelve Months
Over Twelve Months
Unrealized
Fair
Loss
Value
$
522
$ 13,591
19
1,741
Unrealized
Fair
Loss
Value
$
113
$
3,485
411
18,787
$
541
$
15,332
$
524
$
22,272
$
1
$
148
$
144
$
3,744
53
$
18
54
8,927
$
9,075
44
$
188
6,958
$
10,702
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 3: Investment Securities, Continued…)
…Temporarily Impaired Securities, Continued
The Bank does not believe that the investment securities
that were in an unrealized loss position as of December 31,
2009, which was comprised of 6 U.S Municipal bond securities, 27 Small Business Administration (SBA) Pool securities
and 26 mortgage-backed securities issued by Government
.ATIONAL-ORTGAGE!SSOCIATION&EDERAL(OME,OAN-ORTGAGE
#ORPORATIONAND&EDERAL.ATIONAL-ORTGAGE!SSOCIATIONWERE
other-than-temporarily impaired.
maturity, the Bank does not consider those investments to be
other-than-temporarily impaired at December 31, 2009.
The unrealized losses in SBA Pool securities and mortgagebacked securities issued by U.S government agency and GSEs
were caused by increases in interest guidance rates. The Bank
purchased those investments at a discount relative to their
face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S Government.
!CCORDINGLY IT IS EXPECTED THAT THE SECURITIES WOULD NOT BE
settled at a price less than the amortized cost bases of the
The unrealized losses in U.S Municipal bonds were caused by
Bank’s investments. Because the decline in market value is
interest rate increases. The contractual terms of those investattributable to changes in interest rates and not credit quality,
MENTS WHICH ARE &ITCH RATED !!! AND ARE INSURED DO NOT
and because the Bank does not intend to sell the investments
permit the issuer to settle the securities at a price less than the
before recovery of their amortized cost bases, which may be
amortized cost bases of the investments. Because the Bank
maturity, the Bank does not consider those investments to be
does not intend to sell the investments and it is not more likely
other-than-temporarily impaired at December 31, 2009.
than not that the Bank will be required to sell the investments
before recovery of their amortized cost bases, which may be
Note 4 - Loans
A summary of the balances of loans at December 31, 2009 and 2008 follows:
2009
Commercial
Consumer
Real estate
Government
Other
Gross loans
Less: net deferred loan fees
Less: allowance for loan losses
Net loans
2008
$ 345,712
102,024
86,329
23,746
2,662
$ 333,365
84,629
79,367
26,036
2,924
560,473
1,281
8,895
526,321
1,210
9,943
$ 550,297
$ 515,168
!T$ECEMBERANDLOANSTODIRECTORSANDEXECUTIVEOFFICERSOFTHE"ANKAMOUNTEDTOANDRESPECTIVELY4HESELOANSWEREEXTENDEDINTHENORMALCOURSEOFBUSINESSANDATPREVAILINGINTERESTRATES!T$ECEMBERAND
2008, undisbursed commitments amounted to $7,925 and $4,946, respectively.
!T$ECEMBERLOANSOUTSTANDINGWERECOMPRISEDOFAPPROXIMATELYVARIABLERATELOANSANDFIXEDRATELOANS
Deloitte & Touche Audit Report
Mortgage loans serviced for others are not included in the accompanying consolidated statements of condition. The unpaid
principal balances of mortgage loans serviced for others were $159,255 and $143,200 at December 31, 2009 and 2008, respectively. On December 31, 2009 and 2008, the Bank recorded mortgage servicing rights at their fair value of $965 and $719,
respectively.
19
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 4: Loans, Continued…)
A summary of the changes in the allowance for loan losses for the years ended December 31, 2009, 2008 and 2007, follows:
2009
2008
2007
Balance at beginning of year
Provision for loan losses
Loans charged-off
Recoveries of loans previously charged-off
$
9,943
2,550
(4,659)
1,061
$
9,000
2,400
(2,681)
1,224
$
8,891
929
(2,094)
1,274
Balance at end of year
$
8,895
$
9,943
$
9,000
The following is a summary of information pertaining to impaired loans:
2009
2008
Carrying value of impaired loans without a valuation allowance
Carrying value of impaired loans with a valuation allowance
$
5,650
5,208
$
9,746
Total impaired loans
$
10,858
$
9,746
Valuation allowance related to total impaired loans
$
1,091
$
1,331
Total non-accrual loans
$
10,858
$
9,536
Total loans past-due ninety days or more and still accruing
$
5,172
$
2,085
2009
2008
2007
Average investment in impaired loans
$
10,302
$
7,600
$
6,779
Interest income recognized on impaired loans,
all based on cash basis
$
262
$
226
$
61
Note 5 - Premises and Equipment
A summary of premises and equipment at December 31, 2009 and 2008 follows:
2009
Cost
Accumulated
Depreciation
Net
Book Value
27,742
$ (14,108)
$
22,641
(17,867)
4,774
Automobiles and mobile facilities
1,383
(941)
442
Leasehold improvements
3,507
(2,414)
1,093
55,273
(35,330)
19,943
696
-
696
55,969
$ (35,330)
Deloitte & Touche Audit Report
Buildings
20
$
Furniture and equipment
In-progress
$
$
13,634
20,639
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 5: Premises and Equipment, Continued…)
2008
Cost
Accumulated
Depreciation
Net
Book Value
27,568
$ (13,382)
$
21,445
(16,324)
5,121
Automobiles and mobile facilities
1,342
(692)
650
Leasehold improvements
3,625
(2,222)
1,403
53,980
(32,620)
21,360
1,211
-
1,211
55,191
$ (32,620)
Buildings
$
Furniture and equipment
In-progress
$
$
14,186
22,571
&ORTHEYEARSENDED$ECEMBERANDDEPRECIATIONEXPENSEAMOUNTEDTOANDRESPECtively.
Note 6 - Other Assets
A summary of other assets at December 31, 2009 and 2008 follows:
2009
Prepaid income tax
Prepaid FDIC assessments for 2010, 2011 and 2012
Prepaid expenses
Foreclosed assets, net
Deferred tax asset
Other receivables
Mortgage servicing rights
Credit card and merchant service settlement clearing
Discount on purchase of income tax credit
Other
2008
$
12,149
5,853
5,177
3,878
2,813
1,819
965
(798)
163
$
4,773
252
2,418
1,567
719
722
389
$
32,019
$
10,840
&ORECLOSEDASSETSAREPRESENTEDNETOFANALLOWANCEFORLOSSES!SUMMARYOFTHECHANGESINFORECLOSEDASSETSISASFOLLOWS
Balance at beginning of year
$
Additions
Sales
Writedowns/loss on sale, net
Change in valuation allowances
Balance at end of year
$
2008
252
$
657
3,862
225
(294)
(676)
3,820
206
4
(45)
54
91
3,878
$
252
Deloitte & Touche Audit Report
2009
21
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 6: Other Assets, Continued…)
!SUMMARYOFFORECLOSEDASSETOPERATIONSWHICHAREINCLUDEDINNONINTERESTEXPENSESFORTHEYEARSENDED$ECEMBER
2009, 2008 and 2007, is as follows:
2009
2008
2007
Real estate operations, net
$
58
$
71
$
23
Gain on the sale of the foreclosed assets
(14)
(22)
-
Writedowns
10
67
215
Change in valuation allowances
(54)
(91)
(51)
Net losses from other real estate operations
$
-
$
25
$
187
Note 7 - Deposits
A summary of deposits at December 31, 2009 and 2008 follows:
2009
Non-interest bearing deposits
$ 213,292
$ 205,333
72,830
311,484
67,292
215,367
84,004
17,951
112,333
598,602
128,230
23,221
100,220
534,330
$ 811,894
$ 739,663
Interest bearing deposits:
Demand deposits
Regular savings
Time deposits:
$100,000 or more
Less than $100,000
Other interest bearing deposits
Total
2008
At December 31, 2009, the scheduled maturities of time deposits are as follows:
Deloitte & Touche Audit Report
Year ending December 31,
22
2010
2011
2012
2013
2014
Thereafter
$
98,875
1,458
354
419
551
298
$ 101,955
Note 8 - Borrowings
Federal Home Loan Bank (FHLB) Advances
4HE"ANKHASACREDITLINEWITHTHE&(,"EQUALTOOFTOTALASSETS!T$ECEMBERANDTHE"ANKHADOUTSTANDing advances against this credit line under Blanket Agreements for Advances and Security Agreements (the Agreements) of
ANDRESPECTIVELY4HE!GREEMENTSENABLETHE"ANKTOBORROWFUNDSFROMTHE&(,"TOFUNDMORTGAGELOAN
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 8: Borrowings, Continued…)
PROGRAMSANDTOSATISFYCERTAINOTHERFUNDINGNEEDS4HEWEIGHTEDAVERAGERATEOFINTERESTAPPLICABLETOTHEADVANCEWAS
ANDAT$ECEMBERANDRESPECTIVELY
The advances outstanding at December 31, 2009 are due to mature as follows:
Year ending December 31,
2010
2011
2012
2013
$
$
20,000
10,000
5,000
35,000
The value of first lien one-to-four unit mortgage loans and first lien multifamily loans pledged under the Agreements must be
MAINTAINEDATNOTLESSTHANANDRESPECTIVELYOFTHEADVANCESOUTSTANDING
Overnight Fed Fund Lines
At December 31, 2009 and 2008, the Bank had $17,000 and $29,000, respectively, in federal funds lines of credit available with
its correspondent banks. At December 31, 2009, $10,000 was outstanding against these lines. No borrowings were outstanding
as of December 31, 2008.
Note 9 - Income Taxes
4HEINCOMETAXPROVISIONINCLUDESTHEFOLLOWINGCOMPONENTS
2009
Government of Guam income taxes:
Current
Deferred
Foreign income taxes (including U.S. income taxes)
Total income tax expense
2008
2007
$
1,167
410
351
$
2,419
(324)
314
$
3,300
322
$
1,928
$
2,409
$
3,622
4HECOMPONENTSOFDEFERREDINCOMETAXESAREASFOLLOWS
2009
2008
2007
Deferred loan origination fees
Mortgage servicing rights
Loan loss provision
Deferred rent obligation
Foreclosed assets valuation
$
(24)
84
356
(24)
18
$
(33)
(2)
(321)
(31)
63
$
(19)
60
(37)
(35)
31
Deferred tax provision (benefit)
$
(410)
$
(324)
$
-
2009
Deferred tax assets:
Allowance for loan losses
Foreclosed assets
Net unrealized loss (gain) on securities available for sale
Net unrealized loss on securities held to maturity
Loan origination fees
Deferred rent obligation
Total deferred tax asset
$
3,025
64
563
355
435
161
4,603
2008
$
3,381
82
(308)
421
411
137
4,124
2007
$
3,060
145
(208)
469
378
106
3,950
Deloitte & Touche Audit Report
4HECOMPONENTSOFTHENETDEFERREDTAXASSETAREASFOLLOWS
23
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 9: Income Taxes, Continued…)
2009
Deferred tax liability:
Depreciation
Mortgage servicing rights
Total deferred tax liability
Net deferred tax asset
$
2008
2007
(1,462)
(328)
(1,462)
(244)
(1,462)
(246)
(1,790)
(1,706)
(1,708)
2,813
$
2,418
$
2,242
.OVALUATIONALLOWANCEHASBEENPROVIDEDTOREDUCETHEDEFERREDTAXASSETBECAUSEINMANAGEMENTSOPINIONITISMORELIKELY
than not that the entire amount will be realized.
4HEDIFFERENCEBETWEENEFFECTIVEINCOMETAXEXPENSEANDINCOMETAXEXPENSECOMPUTEDATTHE'UAMSTATUTORYRATEWASDUETO
NONTAXABLEINTERESTINCOMEEARNEDONLOANSTOTHE'OVERNMENTOF'UAMFOREACHOFTHEYEARSENDED$ECEMBER
and 2007.
4HE"ANKFILESINCOMETAXRETURNSIN'UAM#.-)ANDTHE3TATEOF#ALIFORNIA4HE"ANKISNOLONGERSUBJECTTO53FEDERAL
STATEANDLOCALORNON53INCOMETAXEXAMINATIONSBYTAXAUTHORITIESFORYEARSBEFORE
Note 10 - Employee Benefit Plans
Deloitte & Touche Audit Report
Stock Purchase Plan
The Bank has a stock purchase plan that covers substantially
all employees meeting the minimum service requirements.
Under the plan, qualified employees are allowed to participate in the purchase of designated shares of the Bank’s comMONSTOCKATOFFAIRMARKETVALUEATDATEOFEXERCISE!
MAXIMUMOFSHARESAREAUTHORIZEDFORISSUANCE!SOF
December 31, 2009, 1,657 rights to purchase shares have been
GRANTEDTOEMPLOYEES2IGHTSTOPURCHASESHARESAREEXERCISABLEFORATENYEARPERIODFROMTHEDATEOFGRANT&ORTHEYEARS
ended December 31, 2009, 2008 and 2007, shares totaling 34,
33 and 35 respectively, were issued under the plan at average
prices per share of $7.87, $7.57 and $7.40, respectively.
24
Executive Employment Agreements
4HE0RESIDENTANDTHE%XECUTIVE6ICE0RESIDENTAREEMPLOYED
under separate agreements terminating December 31, 2012
and May 31, 2013, respectively. Under the agreements, they
receive specified base salaries, which are adjusted annuALLY FOR CHANGES IN THE 53 #ONSUMER 0RICE )NDEX PLUS AN
INCENTIVE BONUS 4HE 0RESIDENTS AND THE %XECUTIVE 6ICE
President’s bonuses are based on profitability, also within
the defined limit, subject to adjustments based on the Bank
meeting certain performance criteria.
Under an agreement with the Bank, the designated survivor
of the late Chairman is receiving a bonus based on the level
of qualified assets or profitability, within a defined limit,
through 2010.
Under a Phantom Stock unit and stock option plan, the
0RESIDENTAND%XECUTIVE6ICE0RESIDENTMAYELECTTORECEIVE
up to $100 each in Phantom Stock units in lieu of an equal
amount of incentive bonus as computed in their employment
agreements. These nonvoting Phantom Stock units may be
held for receipt of dividends equal to the dividend rate of the
Bank’s common stock or may be redeemed at a price equal
TO THE MARKET VALUE OF THE "ANKS COMMON STOCK )N ADDITION FOR EACH 0HANTOM 3TOCK UNIT RECEIVED THE EXECUTIVE
employee receives options to purchase three shares of the
Bank’s common stock at a price equal to the market value of
the stock at the date the options are granted. The redemption
OFTHE0HANTOM3TOCKORTHEEXERCISEOFTHEOPTIONSWILLRESULT
IN THE FORFEITURE BY THE EXECUTIVE EMPLOYEE OF ANY RIGHTS
under the other. At December 31, 2009 and 2008, there were
no Phantom Stock units outstanding under the plan.
Senior Vice Presidents Employment
Agreements
Seven Senior Vice Presidents entered into separate 5-year
employment agreements terminating on December 31, 2011.
Under the agreements, they receive specified base salaries
and they may receive bonuses, within a defined limit, based
on the Bank’s profitability, adjusted by certain Bank performance criteria.
Employee Retirement Savings Plan
The Bank has a 401(k) Plan whereby substantially all employees, with at least one year of continuous service, are eligible
to participate in the Plan. The Bank made matching conTRIBUTIONS EQUAL TO PERCENT OF THE FIRST SIX PERCENT OF AN
employee’s compensation contributed to the Plan through
&EBRUARY%FFECTIVE-ARCHTHE"ANKMAKES
MATCHING CONTRIBUTIONS EQUAL TO OF AN EMPLOYEES
DEFERRALS UP TO OF THE EMPLOYEES COMPENSATION PLUS
OFTHEEMPLOYEESDEFERRALSTHATEXCEEDBUTLESSTHAN
OF THE EMPLOYEES COMPENSATION 0REVIOUSLY MATCHING
contributions vest to the employee over a five-year period
of service. Effective March 1, 2008, matching contributions
BECOMEVESTEDTOTHEEMPLOYEEAFTERYEARSOFSERVICE
&OR THE YEARS ENDED $ECEMBER AND EXPENSEATTRIBUTABLETOTHE0LANAMOUNTEDTOAND
$242, respectively.
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
Note 11 - Lease Commitments
The Bank utilizes facilities, equipment and land under various operating leases with terms ranging from 1 to 99 years. Some
OFTHESELEASESINCLUDESCHEDULEDRENTINCREASES4HETOTALAMOUNTOFTHERENTISBEINGDEBITEDTOEXPENSEONTHESTRAIGHTLINE
METHODOVERTHETERMSOFTHELEASESINACCORDANCEWITH3&!3.O4HE"ANKHASRECORDEDADEFERREDOBLIGATIONOFAND
ASOF$ECEMBERANDRESPECTIVELYWHICHHASBEENINCLUDEDUNDEROTHERLIABILITIESTOREFLECTTHEEXCESSOF
RENTEXPENSEOVERCASHPAIDONTHELEASES
At December 31, 2009, annual lease commitments under the above noncancelable operating leases were as follows:
Year ending December 31,
2010
2011
2012
2013
2014
Thereafter
$
1,786
1,410
916
851
743
19,979
$
26,685
The Bank leases certain facilities from two separate entities in which two of its directors have separate ownership interests.
,EASEPAYMENTSMADETOTHESEENTITIESDURINGTHEYEARSENDED$ECEMBERANDWEREAPPROXIMATELY
$252 and $285, respectively.
Additionally, the Bank leases office space to third parties, with original lease terms ranging from 3 to 5 years with option
periods ranging up to 15 years. At December 31, 2009, minimum future rents to be received under noncancelable operating
sublease agreements were as follows:
Year ending December 31,
2010
2011
$
60
13
$
73
A summary of the rental activities for the years ended December 31, 2009, 2008 and 2007, is as follows:
2009
Rent expense
$
$
283
$
2,043
2,285
2007
$
249
$
2,036
2,264
299
$
1,965
Note 12 - Minimum Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements
administered by the United States federal banking agencies.
&AILURE TO MEET MINIMUM CAPITAL REQUIREMENTS CAN INITIate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures
of their assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the following table) of total
Deloitte & Touche Audit Report
Less: sublease rentals
2,326
2008
25
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 12: Minimum Regulatory Capital Requirements, Continued…)
and Tier 1 capital (as defined in the regulations) to riskweighted assets (as defined) and of Tier 1 capital (as defined)
to average assets (as defined). Management believes, as of
December 31, 2009 and 2008, that the Bank met all capital
adequacy requirements to which they are subject.
prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based,
Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
following tables.
There are no conditions or events since the notification that
management believes have changed the Bank’s category. The
As of December 31, 2009, the most recent notification from Bank’s actual capital amounts and ratios as of December 31,
THE &EDERAL $EPOSIT )NSURANCE #ORPORATION CATEGORIZED THE 2009 and 2008 are also presented in the table.
Bank as well capitalized under the regulatory framework for
As of December 31, 2009:
Total capital
(to Risk Weighted Assets)
Tier 1 capital
(to Risk Weighted Assets)
Tier 1 capital
(to Average Assets)
As of December 31, 2008:
Total capital
(to Risk Weighted Assets)
Tier 1 capital
(to Risk Weighted Assets)
Tier 1 capital
(to Average Assets)
Actual
Amount
Ratio
For Capital Adequacy
Purposes
Amount
Ratio
To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$ 89,227
14.95%
$ 47,746
8.00%
$ 59,683
10.00%
$ 81,767
13.70%
$ 23,873
4.00%
$ 35,810
6.00%
$ 81,767
8.07%
$ 40,528
4.00%
$ 50,660
5.00%
$ 86,206
15.66%
$ 44,028
8.00%
$ 55,035
10.00%
$ 79,326
14.41%
$ 22,014
4.00%
$ 33,021
6.00%
$ 79,326
9.25%
$ 34,320
4.00%
$ 42,901
5.00%
Deloitte & Touche Audit Report
Note 13 - Off-Balance Sheet Activities
26
The Bank is a party to credit related financial instruments
with off-balance-sheet risk in the normal course of business
to meet the financing needs of its customers. These financial
INSTRUMENTSINCLUDECOMMITMENTSTOEXTENDCREDITSTANDBY
letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and
INTEREST RATE RISK IN EXCESS OF THE AMOUNT REFLECTED IN THE
consolidated financial statements.
4HE"ANKSEXPOSURETOCREDITLOSSINTHEEVENTOFNONPERFORmance by the other parties to financial instruments for loan
commitments and letters of credit, is represented by the contractual amount of these instruments. The Bank follows the
same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of financial instruments with off-balance-sheet risk at December 31, 2009 and 2008 is as follows:
2009
Commitments to extend credit
Letters of credit:
Standby letters of credit
Other letters of credit
2008
$
62,143
$
98,645
$
21,003
2,792
23,795
$
16,384
1,167
17,551
$
$
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 13: Off-Balance Sheet Activities, Continued…)
#OMMITMENTS TO EXTEND CREDIT ARE AGREEMENTS TO LEND TO A
customer as long as there is no violation of any condition
established in the contract. Commitments generally have
FIXEDEXPIRATIONDATESOROTHERTERMINATIONCLAUSESANDMAY
require payment of a fee. The commitments for certain lines
OF CREDIT MAY EXPIRE WITHOUT BEING DRAWN UPON 4HEREFORE
the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount
of collateral obtained, if it is deemed necessary by the Bank
UPON EXTENSION OF CREDIT IS BASED ON MANAGEMENTS CREDIT
evaluation of the customer.
Commercial and standby letters-of-credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a third party or shipment of merchandise from a third party. Those letters-of-credit are primarily
issued to support public and private borrowing arrangements.
%SSENTIALLY ALL LETTERS OF CREDIT ISSUED HAVE EXPIRATION DATES
within one year. The credit risk involved in issuing lettersOFCREDITISESSENTIALLYTHESAMEASTHATINVOLVEDINEXTENDING
loan facilities to customers. The Bank generally holds collateral supporting those commitments. Management does
not anticipate any material losses as a result of these transactions.
The Bank considers its standby letters of credit to be guarANTEES!T$ECEMBERTHEMAXIMUMUNDISCOUNTED
future payments that the Bank could be required to make was
$21,003. All of these arrangements mature within one year.
The Bank generally has recourse to recover from the customer
any amounts paid under these guarantees. Most of the guarANTEESAREFULLYCOLLATERALIZEDHOWEVERSEVERALAREUNSECURED
The Bank had not recorded any liabilities associated with
these guarantees at December 31, 2009.
Note 14 - Fair Value of Financial Assets and Liabilities
The Bank uses fair value measurements to record fair value
adjustments to certain assets and liabilities and to determine
FAIR VALUE DISCLOSURES )N ACCORDANCE WITH THE Fair Value
Measurements and Disclosures TOPIC OF &!3" !3# THE
fair value of a financial instrument is the price that would
be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the
MEASUREMENTDATE&AIRVALUEISBESTDETERMINEDBASEDUPON
quoted market prices. However, in many instances, there
are no quoted market prices for the Bank’s various financial
INSTRUMENTS )N CASES WHERE QUOTED MARKET PRICES ARE NOT
available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly,
the fair value estimates may not be realized in an immediate
settlement of the instrument.
Fair Value Hierarchy
)NACCORDANCEWITHTHISGUIDANCETHE"ANKGROUPSITSFINAN-
LEVEL 1: Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity
has the ability to access at the measurement date. Level 1
assets and liabilities generally include debt and equity securiTIESTHATARETRADEDINANACTIVEEXCHANGEMARKETASWELLAS
certain U.S. Treasury securities that are highly liquid and are
actively traded in over-the-counter markets. Valuations are
obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.
LEVEL 2: Valuation is based on inputs other than quoted
prices included within Level 1 that are observable for the asset
or liability, either directly or indirectly. The valuation may be
BASEDONQUOTEDPRICESFORSIMILARASSETSORLIABILITIESQUOTED
PRICESINMARKETSTHATARENOTACTIVEOROTHERINPUTSTHATARE
observable or can be corroborated by observable market data
for substantially the full term of the asset or liability, such as
QUOTEDPRICESFORSIMILARASSETSORLIABILITIESQUOTEDPRICESIN
MARKETSTHATARENOTACTIVEOROTHERINPUTSTHATAREOBSERVable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
LEVEL 3: Valuation is based on unobservable inputs that are
supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets
and liabilities include financial instruments whose value
is determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments
for which determination of fair value requires significant
management judgment or estimation.
Deloitte & Touche Audit Report
The recent fair value guidance provides a consistent definiTION OF FAIR VALUE WHICH FOCUSES ON EXIT PRICE IN AN ORDERLY
transaction (that is, not a forced liquidation or distressed
sale) between market participants at the measurement date
UNDER CURRENT MARKET CONDITIONS )F THERE HAS BEEN A SIGnificant decrease in the volume and level of activity for the
asset or liability, a change in valuation technique or the use
OF MULTIPLE VALUATION TECHNIQUES MAY BE APPROPRIATE )N
such instances, determining the price at which willing market
participants would transact at the measurement date under
current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair
value is a reasonable point within the range that is most representative of fair value under current market conditions.
cial assets and financial liabilities generally measured at fair
value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to determine fair value.
27
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 14: Fair Value of Financial Assets and Liabilities, Continued…)
…Fair Value Hierarchy, Continued
A financial instrument’s categorization within the valuation
hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used by the
Bank in estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amount of cash and short-term instruments
APPROXIMATES FAIR VALUE BASED ON THE SHORTTERM NATURE OF
the assets.
Interest-Bearing Deposits in Banks
&AIRVALUESFOROTHERINTERESTBEARINGDEPOSITSAREESTIMATED
using discounted cash flow analyses based on current rates for
similar types of deposits.
Investment Securities
When quoted prices are available in an active market, the
Bank classifies the securities within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid U.S
Government debt and equity securities.
)FQUOTEDMARKETPRICESARENOTAVAILABLETHE"ANKESTIMATES
fair values using pricing models and discounted cash flows
that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/
DEALER QUOTES AND CREDIT SPREADS %XAMPLES OF SUCH INSTRUments, which would generally be classified within Level 2 of
the valuation hierarchy, include GSE obligations, corporate
bonds, and other securities. Mortgage-backed securities are
INCLUDEDIN,EVELIFOBSERVABLEINPUTSAREAVAILABLE)NCERtain cases where there is limited activity or less transparency
around inputs to the valuation, the Bank would classify those
securities in Level 3. At December 31, 2009 and 2008, the
Bank did not have any Level 3 securities.
RYINGVALUES&AIRVALUESFOROTHERLOANSAREESTIMATEDUSING
discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of
SIMILARCREDITQUALITY&AIRVALUESFORNONPERFORMINGLOANSARE
estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
Mortgage Servicing Rights
The fair value of MSRs is determined using models which
depend on estimates of prepayment rates and resultant
weighted average lives of the MSRs and the option adjusted
spread levels.
Deposit Liabilities
4HEFAIRVALUESDISCLOSEDFORDEMANDDEPOSITSFOREXAMPLE
interest and non-interest checking, passbook savings and
certain types of money market accounts) are, by definition,
equal to the amount payable on demand at the reporting date
THAT IS THEIR CARRYING AMOUNTS &AIR VALUES FOR FIXEDRATE
certificates of deposit are estimated using a discounted cash
flow calculation that applies market interest rates currently on
COMPARABLEINSTRUMENTSTOASCHEDULEOFAGGREGATEDEXPECTED
monthly maturities on time deposits.
Short-Term Borrowings
4HECARRYINGAMOUNTSOFFEDERALFUNDSPURCHASEDAND&(,"
ADVANCESMATURINGWITHINNINETYDAYSAPPROXIMATETHEIRFAIR
values.
Long-Term Borrowings
&AIR VALUE OF &(," ADVANCES MATURING AFTER NINETY DAYS IS
DETERMINEDBASEDONEXPECTEDPRESENTVALUETECHNIQUESBASED
on current market rates for advances with similar terms and
remaining maturities.
Accrued Interest
4HE CARRYING AMOUNT OF ACCRUED INTEREST APPROXIMATES FAIR
value.
Off-Balance Sheet Commitments and
Contingent Liabilities
Management does not believe it is practicable to provide an
estimate of fair value because of the uncertainty involved in
Loans
attempting to assess the likelihood and timing of a commit&OR VARIABLERATE LOANS THAT REPRICE FREQUENTLY AND WITH NO ment being drawn upon, coupled with a lack of an established
significant change in credit risk, fair values are based on car- market and the wide diversity of fee structures.
Deloitte & Touche Audit Report
Federal Home Loan Bank Stock
4HECARRYINGVALUEOF&EDERAL(OME,OAN"ANKSTOCKAPPROXImates fair value.
28
&INANCIALASSETSMEASUREDATFAIRVALUEONARECURRINGBASISASOF$ECEMBERANDAREASFOLLOWS
Quoted Prices
in Active
Markets for
Indentical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
-
$ 238,198
-
-
-
$ 238,198
December 31, 2009
Investment securities
Available for Sale
Other assets:
MSRs
Total assets
$
$
$
$
Total
-
$ 238,198
965
965
965
$ 239,163
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 14: Fair Value of Assets and Liabilities, Continued…)
Quoted Prices
in Active
Markets for
Indentical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
2,250
$ 158,479
-
-
2,250
$ 158,479
December 31, 2008
Investment securities
Available for Sale
Other assets:
MSRs
Total assets
$
$
$
$
Total
-
$ 160,729
719
719
719
$ 161,448
There are no liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008.
During the years ended December 31, 2009 and 2008, the changes in Level 3 assets measured at fair value on a recurring basis
are as follows:
2009
2008
Beginning balance
Realized and unrealized net gains (losses):
Included in net income
Included in other comprehensive income
Purchases, sales and issuances, net
$
Ending balance
$
719
$
246
965
721
(2)
-
$
719
At December 31, 2009 and 2008, there are no unrealized gains or losses related to Level 3 MSRs.
There were no transfers in or out of the Bank’s Level 3 financial assets for the years ended December 31, 2009 and 2008.
Assets Measured at Fair Value on a Nonrecurring Basis
Under certain circumstances the Bank makes adjustments to fair value for assets and liabilities though they are not measured
at fair value on an ongoing basis. The following table presents the financial instruments carried on the consolidated statements
of condition by caption and by level in the fair value hierarchy at December 31, 2009, for which a nonrecurring change in fair
value has been recorded:
Quoted Prices
in Active
Markets for
Indentical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
Financial Assets:
Loans, net
Impaired loans
$
-
$
3,184
$
-
Total
$
3,184
Additionally, the Bank also makes adjustments to nonfinancial assets and liabilities though they are not measured at fair value
on an ongoing basis. The Bank does not have nonfinancial assets or liabilities for which a nonrecurring change in fair value has
been recorded during the year ended December 31, 2009.
Deloitte & Touche Audit Report
)N ACCORDANCE WITH THE PROVISIONS OF LOAN IMPAIRMENT GUIDANCE &!3" !3# INDIVIDUAL LOANS WITH A CARRYING
amount of $5,209 were written down to their fair value of $3,184, resulting in an impairment charge of $2,025, which was
recorded as charge offs to the allowance for loan losses. Loans applicable to write downs of impaired loans are estimated using
the appraised value of the underlying collateral discounted as necessary due to management’s estimates of changes in economic
conditions less estimated costs to sell.
29
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Note 14: Fair Value of Assets and Liabilities, Continued…)
Fair Value of Other Financial Instruments
4HEESTIMATEDFAIRVALUESOFTHE"ANKSOTHERFINANCIALINSTRUMENTSEXCLUDINGTHOSEASSETSRECORDEDATFAIRVALUEONARECURRING
basis on the Bank’s consolidated statements of condition, are as follows:
2009
Carrying
Amount
Financial assets:
Cash and cash equivalents
2008
Fair
Value
Carrying
Amount
Fair
Value
$
46,336
$
46,336
$
88,091
$
88,091
Interest bearing deposit with banks
$
6,150
$
6,150
$
5,154
$
5,154
Investment securities held to maturity
$
38,495
$
39,263
$
48,610
$
48,618
Federal Home Loan Bank stock
$
2,198
$
2,198
$
2,198
$
2,198
Loans, net
$ 550,297
$ 552,558
$ 515,168
$ 517,250
Accrued interest receivable
$
$
$
$
Financial liabilities:
Deposits
5,457
5,457
4,133
4,133
$ 811,894
$ 812,872
$ 739,663
$ 739,221
Accrued interest payable
$
418
$
418
$
972
$
972
Federal funds purchased
$
10,000
$
10,000
$
-
$
-
Federal Home Loan Bank advances
$
35,000
$
35,000
$
35,000
$
35,000
Note 15 - Contingency
Deloitte & Touche Audit Report
The Bank is involved in certain legal actions and claims that arise in the ordinary course of business. Management believes
that, as a result of its legal defenses and insurance arrangements, none of these matters have a material adverse effect on the
Bank’s financial position, results of operations or cash flows.
30
Management’s Discussion and Analysis of Financial Condition and Results of Operations
[$ in tables in thousands]
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
!T$ECEMBERTHE"ANKSTOTALASSETSHADINCREASEDBYTOCLOSETHEYEARATMILLIONUPMILLIONFROM
$858.3 million in 2008. This is largely attributed to a $35.1 million increase in net Loans, a $21.2 million increase in Other
!SSETSANDAMILLIONINCREASEIN)NTEREST"EARING$EPOSITSWITH"ANKS
Assets
2009
2008
$ Change % Change
Cash and Due from Banks
Federal Funds Sold
Interest Bearing Deposits with Banks
Total Cash and Cash Equivalents
$ 25,748
20,588
46,336
$ 28,070
55,000
5,021
88,091
$ (2,322)
(55,000)
15,567
(41,755)
(8.3%)
(100.0%)
310.0%
(47.4%)
Interest Bearing Deposits with Banks
Investment Securities Available-For-Sale
Investment Securities Held-To-Maturity
Federal Home Loan Bank Stock, at Cost
Loans, Net of Allowance for Loan Losses
Accrued Interest Receivable
Premises and Equipment, net
Goodwill
Other Assets
Total Assets
6,150
238,198
38,495
2,198
550,297
5,457
20,639
783
32,019
$ 940,572
5,154
160,729
48,610
2,198
515,168
4,133
22,571
783
10,840
$ 858,277
996
77,469
(10,115)
–
35,129
1,324
(1,932)
–
21,179
$ 82,295
19.3%
48.2%
(20.8%)
–
6.8%
32.0%
(8.6%)
–
195.4%
9.6%
While the economies in our regional markets were not significantly affected by the global financial crisis, the Bank was affected
BY53GOVERNMENTSPOLICYRESPONSETOTHEFINANCIALCRISIS"EGINNINGINLATETHE&EDERAL2ESERVELOWEREDANDHASMAINTAINEDAFEDERALFUNDSTARGETRATEATTO#ONSEQUENTLYTHISCAUSEDMARKETINTERESTRATESTODECLINEANDREMAINAT
historically low levels during 2009, which in turn put downward pressure on our interest revenues despite the $63.0 million
growth in our total earning assets portfolio. As a result, our total interest income for the year of $49.6 million is down $0.4 milLIONFROMMILLIONIN(OWEVERWEWEREABLETOOFFSETTHEDECLINEINTOTALINTERESTINCOMEASWEALSOGRADUALLY
LOWEREDTHEINTERESTRATESONOURINTERESTBEARINGLIABILITIESDURINGTHEYEARANDTHUSREDUCEDOURTOTALINTERESTEXPENSEBY
MILLIONTOMILLIONFROMMILLIONIN/NANETBASISOUR.ET)NTEREST)NCOMEBEFORE0ROVISIONFOR,OAN
Losses for the year totaled $40.6 million, up $0.4 million from $40.2 million in 2008.
Although economic conditions and the historically low interest rate environment presented major challenges during 2009, we
WEREABLETOEXPANDANDGROWOURCOREBUSINESSANDCONTINUEDTODELIVERSUSTAINEDPROFITPERFORMANCE7ECLOSEDTHEYEAR
WITH4OTAL!SSETSOFMILLIONUPMILLION4OTAL$EPOSITSOFMILLIONUPMILLIONAND
RECORDED.ET0ROFITSAFTER4AXESOFMILLIONDOWNFROMMILLIONIN!LTHOUGHLOWERTHANTHEPRIORYEAROUR
$5.5 million in Net Profits in 2009 still allowed us to continue paying regular, quarterly dividends that totaled $4.3 million for
the year, and contributed an additional $1.2 million to our Common Shareholders’ Equity. However, despite the $1.2 million
in equity contribution from our net profits during the year, our total Common Shareholders’ Equity closed the year at $80.9
31
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUED)
[$ in tables in thousands]
MILLIONDOWNBYMILLIONFROMMILLIONIN4HISISPRIMARILYATTRIBUTEDTOTHEMILLIONDOWNWARD
adjustment in our equity due to the “unrealized loss” resulting from the revaluation of our available-for-sale investment securiTIES7EDONOTEXPECTTHESELOSSESTOULTIMATELYBEREALIZEDINTHEORDINARYCOURSEOFBUSINESS
&OROURRATEOFRETURNONASSETS2/!ANDRETURNONEQUITY2/%STOODATANDRESPECTIVELYDOWNFROM
LASTYEARS2/!AND2/%DUETOTHEDECLINEINOURCURRENTYEARNETPROFITS!LTHOUGHLOWERTHANTHEPRIORYEARS
levels, our ROA and ROE this year remained positive and compare quite favorably to our peer group, which reported ROA at
AND2/%ATFORTHEYEAR
Income
Total Interest Income
Total Interest Expense
Net Interest Income
Provision for Loan Losses
Net Interest Income after Provision
Total Non-Interest Income
Total Non-Interest Expense
Income Before Income Taxes
Income Tax Expense
Net Income
2009
2008
$ 49,624
9,025
40,599
2,550
38,049
12,154
42,774
7,429
1,928
$ 5,501
$ 50,021
9,843
40,178
2,400
37,778
10,718
39,878
8,618
2,409
$ 6,209
$ Change
$
(397)
(818)
421
150
271
1,436
2,896
(1,189)
(481)
$
(708)
% Change
(0.8%)
(8.3%)
1.0%
6.3%
0.7%
13.4%
7.3%
(13.8%)
(20.0%)
(11.4%)
Loans and Deposits
Despite the economic challenges in our regional markets during 2009, we continued our firm commitment to actively support
ANDCONTRIBUTETOTHEECONOMICHEALTHANDGROWTHOFTHECOMMUNITIESTHATWESERVEBYAGGRESSIVELYEXPANDINGOURLOANAND
CREDITCARDPROGRAMSTHROUGHOUTTHEISLANDS!SARESULTOURTOTALLOANSNETOFDEFERREDLOANFEESGREWBYMILLION
to $559.2 million, up from $525.1 million in 2008. Our Consumer loan portfolio (inclusive of Credit Card balances) registered
THELARGESTINCREASEANDREACHEDMILLIONUPMILLIONFROMMILLIONFOLLOWEDBY#OMMERCIALLOANS
ATMILLIONUPMILLIONFROMMILLIONAND2EAL%STATELOANSATMILLIONUPMILLION
from $79.4 million in 2008. Our Government loan portfolio, on the other hand, decreased by $2.3 million to $23.7 million, down
FROMMILLIONLASTYEAR
Loans
Commercial
Consumer
Real Estate
Government Loans
Other Loans
Gross Loans
Less: Net Deferred Loan Fees
Less: Allowance for Loan Losses
Net Loans
2009
2008
$ Change
% Change
$ 345,712
102,024
86,329
23,746
2,662
560,473
1,281
8,895
$ 550,297
$ 333,365
84,629
79,367
26,036
2,924
526,321
1,210
9,943
$ 515,168
$ 12,347
17,395
6,962
(2,290)
(262)
34,152
71
(1,048)
$ 35,129
3.7%
20.6%
8.8%
(8.8%)
(9.0%)
6.5%
5.9%
(10.5%)
6.8%
While the Bank continued its focus on strong asset quality through our stringent underwriting standards and effective collection efforts, our average volume of loans categorized as impaired increased to $10.9 million, up from $9.7 million last year. Due
PRIMARILYTOWRITEDOWNSOFEXISTINGLOANSGROSSLOANLOSSESININCREASEDTOMILLIONUPFROMMILLIONWHILE
recoveries of loans previously charged-off dropped slightly to $1.1 million from $1.2 million last year. As a result, net loan losses
FORTHEYEARINCREASEDBYMILLIONTOMILLIONUPFROMMILLIONLASTYEAR
Impaired Loans
Impaired Loans
Interest income recognized on Impaired Loans
32
2009
$ 10,858
$
262
2008
$
$
9,746
226
$ Change
$
$
1,112
36
% Change
11.4%
15.9%
(CONTINUED)
[$ in tables in thousands]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Loan Losses
Gross Loan Losses
Recoveries of charged-off loans
Net Loan Losses
2009
$
$
4,659
1,061
3,598
2008
$
$
2,681
1,224
1,457
$ Change
$
$
1,978
(163)
2,141
% Change
73.8%
(13.3%)
146.9%
On the liabilities side, our total deposit base registered substantial growth in 2009, closing the year at $811.9 million, up $72.2
MILLIONFROMMILLIONIN2EGULAR3AVINGSTHELEADPRODUCTINTERMSOFBOTHABSOLUTEDOLLARAMOUNTAND
PERCENTAGEINCREASEREACHEDMILLIONUPMILLIONFROMMILLIONLASTYEAR$EMAND$EPOSITSINTEREST
BEARINGANDNONINTERESTBEARINGCOMBINEDTOTALEDMILLIONUPMILLIONFROMMILLIONWHILE4IME
$EPOSIT/PEN!CCOUNTSINCREASEDBYMILLIONTOCLOSETHEYEARATMILLIONUPFROMMILLIONLASTYEAR
Time Deposits, comprised largely of jumbo time deposits with balances of $100 thousand or more dropped substantially, closINGTHEYEARATMILLIONDOWNMILLIONFROMMILLIONLASTYEAR
Overall, while we attained a commendable growth in our loan portfolio, it was significantly out-paced by a record level of
GROWTHINOURDEPOSITPORTFOLIOWHICHCAUSEDOURLOANTODEPOSITRATIOTODROPBYTOCLOSETHEYEARATDOWNFROM
LASTYEAR
Deposits
Non-Interest Bearing Deposits
Interest Bearing Deposits:
Demand Deposits
Regular Savings
Time Deposits:
$100,000 or more
Less than $100,000
Other Interest Bearing Deposits
2009
2008
$ 213,292
$ 205,333
72,830
311,484
$
% Change
7,959
3.9%
67,292
215,367
5,538
96,117
8.2%
44.6%
84,004
17,951
112,333
128,230
23,221
100,220
(44,226)
(5,270)
12,113
(34.5%)
(22.7%)
12.1%
598,602
534,330
64,272
12.0%
$ 811,894
$ 739,663
$ 72,231
9.8%
Total Interest Bearing Deposits
Total Deposits
$ Change
Liquidity and Investment Portfolio
During 2009, our investment portfolio (which is comprised of U.S. government agency pool securities, U.S. government sponSOREDENTERPRISE'3%MORTGAGEBACKEDSECURITIESBANKQUALIFIEDTAXEXEMPTMUNICIPALBONDSFEDERALFUNDSSOLDANDTIME
DEPOSITSATOTHERBANKSINCREASEDBYMILLIONTOCLOSETHEYEARATMILLIONUPFROMMILLIONIN
4HISISPRIMARILYATTRIBUTEDTOTHEMILLIONNETINCREASEINTHEINVESTMENTSECURITIESCOMPONENTOFTHEPORTFOLIO
which totaled $276.7 million, up from $209.4 million. This increase, however, was partially offset by a $55.0 million decrease
INOVERNIGHTFEDERALFUNDSSOLDASWEFULLYDIVESTEDFROMTHOSEOVERNIGHTINVESTMENTSDUETOTHEIREXTREMELYLOWNEARZERO
INTERESTRATESANDINSTEADINVESTEDTHESEFUNDSINOUR&EDERAL2ESERVE"ANKACCOUNTWHICHEARNEDINTERESTAT
As the crisis in the U.S. financial markets drove market interest rates to historically low levels, causing a high level of volatility
in the bond market during the year, we took proactive steps to minimize the potential adverse impact on the credit quality and
earnings of our investment portfolio by restructuring and reinvesting a portion of our short term agency securities and our
longer-term mortgage-backed securities into shorter-term securities supported by the full faith and credit or guarantee of the
U.S. government. As a result, our restructuring and reinvestment action generated $2.7 million in net gains from securities sold
and helped improve the overall credit quality of our securities portfolio, as well as minimize the adverse impact on our investment interest earnings. During 2009, interest income from our investment portfolio totaled $9.1 million, down $3.6 million
FROMMILLIONANDOURINVESTMENTPORTFOLIOYIELDSTOODATDOWNFROMIN
Investments
Federal Funds Sold
TCDs at Other Banks
Investment Securities-AFS
Investment Securities-HTM
Total Investment Portfolio
2009
2008
$ Change
% Change
11,150
238,198
38,495
$ 287,843
$ 55,000
10,154
160,729
48,610
$ 274,493
$ (55,000)
996
77,469
(10,115)
$ 13,350
(100.0%)
9.8%
48.2%
(20.8%)
4.9%
$
33
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUED)
[$ in tables in thousands]
As required by accounting standards, the Bank accounts for and classifies its investment securities as “Available-for-Sale,”
“Held-to-Maturity” and “Trading,” based on management’s intention regarding their retention. However, in following
through with our intention to hold our investments to maturity, and at the same time providing for our short-term liquidity
requirements, at year-end 2009, we maintained $38.5 million of our investments in U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities as “Held-to-Maturity.” We intend to and we have the ability to hold
these securities to their contractual maturity. We do not engage in trading of securities, and therefore do not hold any of our
securities in the “Trading” classification.
At December 31, 2009, the amortized cost and fair value of our investment securities, with gross unrealized gains and losses,
were as follows:
Gross
Gross
Amortized Unrealized Unrealized
Fair
Investment Securities
Cost
Gains
Losses
Value
Securities available-for-sale:
U.S. Municipal bonds
$ 11,693
$
74
$
(77)
$ 11,690
U.S. Goverment agency pool securities
88,477
229
(473)
88,233
U.S. Government agency and sponsored
enterprise Mortgage-Backed Securities
139,683
50
(1,458)
138,275
Totals
Securities held-to-maturity:
U.S. Goverment agency pool securities
U.S. Government agency and sponsored
enterprise Mortgage-Backed Securities
Totals
$ 239,853
353
$ (2,008)
$ 238,198
3,458
-
(69)
3,389
35,037
1,200
(3)
36,234
(72)
$ 39,623
$ 38,495
$
$
1,200
$
Net Interest Income
/UR.ET)NTEREST)NCOMEAFTERTHE0ROVISIONFOR,OAN,OSSESFORTHEYEARTOTALEDMILLIONUPSLIGHTLYBYMILLION
FROMMILLIONIN4HISINCREASEISPRIMARILYATTRIBUTEDTOTHENETDECREASEOFMILLIONINTOTALINTERESTEXPENSE
which more than offset the $0.4 million net decrease in total interest income. Overall, our net interest margin dropped by 28
BASISPOINTSTOCLOSETHEYEARATDOWNFROMLASTYEAR
Interest Income
/URTOTALINTERESTINCOMEOFMILLIONINREGISTEREDANETDECREASEOFMILLIONDOWNFROMMILlion last year. This net decrease is primarily attributed to the $3.6 million decrease in interest income from our investment
portfolio which more than offset the $3.2 million increase in interest and fees on loans. During 2009, our loan portfolio
GENERATEDINTERESTANDFEESTOTALINGMILLIONUPMILLIONFROMMILLIONIN
Interest Expense
On the other side of the equation, as we gradually reduced the interest rates on our interest bearing liabilities during the
YEAROURTOTALINTERESTEXPENSEINDECREASEDBYMILLIONTOMILLIONDOWNFROMMILLIONIN
This decrease was primarily attributed to the $2.9 million decrease in interest paid on Time Deposits (largely in “jumbo”
TIMEDEPOSITSWITHBALANCESOFTHOUSANDORMOREWHICHTOTALEDMILLIONFORTHEYEARDOWNMILLION
FROMMILLIONLASTYEAR)NADDITIONTHETOTALINTERESTWEPAIDONOUROTHERBORROWEDFUNDSDROPPEDBYMILLION
TOMILLIONDOWNFROMMILLIONLASTYEAR4HESEMORETHANOFFSETTHEMILLIONINCREASEININTERESTPAID
ONOUR3AVINGSPORTFOLIOWHICHTOTALEDMILLIONUPMILLIONFROMMILLIONIN
Interest Income
Interest income:
Loans
Investment Securities
Federal Funds Sold
Deposits with Other Banks
Total Interest Income
34
2009
2008
$ 40,572
8,529
46
477
$ 49,624
$ 37,413
11,568
636
404
$ 50,021
$ Change
$
3,159
(3,039)
(590)
73
$
(397)
% Change
8.4%
(26.3%)
(92.8%)
18.1%
(0.8%)
(CONTINUED)
[$ in tables in thousands]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2009
Interest Expense:
Time Deposits
Savings Deposits
Other Borrowed Funds
Total Interest Expense
Net Interest Income
Before Provision for Loan Losses
Provision for Loan Losses
Net Interest Income after
Provision for Loan Losses
$
1,692
6,228
1,105
9,025
2008
$
4,640
4,022
1,181
9,843
$ Change
% Change
$ (2,948)
2,206
(76)
(818)
(63.5%)
54.8%
(6.4%)
(8.3%)
$ 40,599
$ 2,550
$ 40,178
$ 2,400
$
$
421
150
1.0%
6.3%
$ 38,049
$ 37,778
$
271
0.7%
Non-Interest Income and Non-Interest Expense
Non-interest income, which is derived from service charges, fees, commissions, and other non-interest income sources totaled
MILLIONINUPMILLIONFROMMILLIONIN4HISINCREASEWASPRIMARILYATTRIBUTEDTOANETGAIN
of $2.7 million realized from the sale of investment securities, and the $0.4 million increase in income from services charges
ANDFEESWHICHTOTALEDMILLIONUPFROMMILLIONLASTYEAR4HESEINCREASESWEREHOWEVERPARTIALLYOFFSETBYTHE
$0.2 million decrease in other miscellaneous income, which totaled $5.2 million for the year, down from $5.4 million last year.
This decrease is primarily attributed to the $0.4 million drop in our credit card and merchant services income, which totaled
MILLIONFORTHEYEARDOWNFROMMILLIONLASTYEAR
Non-Interest Income
Service charges and fees
Investment securities gains, net
Other income
Total Non-Interest Income
2009
$
4,265
2,718
5,171
$ 12,154
2008
$
3,854
1,450
5,414
$ 10,718
$ Change
$
$
411
1,268
(243)
1,436
% Change
10.7%
87.4%
(4.5%)
13.4%
/NTHEEXPENSESIDENONINTERESTEXPENSESINTOTALEDMILLIONUPMILLIONFROMMILLIONIN
4HISINCREASEISLARGELYATTRIBUTEDTOTHEINCREASEIN'ENERAL!DMINISTRATIVEAND/THEREXPENSESWHICHINCREASEDBYMILLIONTOMILLIONDURINGTHEYEARUPFROMMILLIONPREVIOUSLY)NADDITIONOUR3ALARIESAND%MPLOYEE"ENEFIT
EXPENSESDURINGTHEYEARINCREASEDBYMILLIONTOMILLIONUPFROMMILLIONLASTYEARANDWERECORDEDA
MILLIONINCREASEIN&URNITUREAND%QUIPMENTEXPENSESWHICHTOTALEDMILLIONUPFROMMILLIONLASTYEAR4HESE
INCREASESMORETHANOFFSETTHENOMINALDECREASEOFLESSTHANMILLIONINOUR/CCUPANCYEXPENSEWHICHTOTALMILLION
FORTHEYEAR4HELARGEINCREASEOFMILLIONINOUR'ENERAL!DMINISTRATIVEAND/THEREXPENSESISLARGELYATTRIBUTEDTOTHE
MILLIONINCREASEIN&$)#INSURANCEPREMIUMASSESSMENTSINCLUSIVEOFAONETIMESPECIALASSESSMENTBASEDONOURND
quarter 2009 insurable deposit balances), which totaled $1.8 million for the year, up from $0.1 million in 2008. The increase in
OUR3ALARIESAND%MPLOYEE"ENEFITEXPENSESCANBEDIRECTLYATTRIBUTEDTOTHECOMBINEDEFFECTOFINCREASINGOURSTAFFINGLEVELS
PRIMARILYATOURBRANCHESTOFACILITATEOUREXTENDEDBRANCHBANKINGHOURSASWELLASSTAFFINGOFOURNEWBRANCHESIN9APAND
+OSRAESTATESINTHE&3-7EALSOIMPLEMENTEDADDITIONALBENEFITSPROGRAMSTOFURTHERSOLIDIFYOUREMPLOYEERETENTIONAND
RECRUITMENTBYPROVIDINGAMORECOMPETITIVECOMPENSATIONPACKAGE4HEMILLIONINCREASEIN&URNITUREAND%QUIPMENT
EXPENSESWASLARGELYATTRIBUTEDTOTHEMILLIONINCREASEINCOMPUTEREQUIPMENTHARDWAREANDSOFTWAREMAINTENANCEAND
SUPPORTEXPENSESWHICHTOTALEDMILLIONFORTHEYEARUPFROMMILLIONLASTYEAR
Non-Interest Expense
Salaries and employee benefits
Occupancy
Furniture and equipment
General, administrative and other
Total Non-Interest Expense
2009
2008
$ 18,839
5,673
5,505
12,757
$ 42,774
$ 18,047
5,740
4,885
11,206
$ 39,878
$ Change
$
$
792
(67)
620
1,551
2,896
% Change
4.4%
(1.2%)
12.7%
13.8%
7.3%
Capital Resources
5NDERCURRENT&$)#REGULATIONSTHE"ANKMUSTMAINTAINATIERCAPITALTOAVERAGEASSETSRATIOANDATIERCAPITALTO
RISKWEIGHTEDASSETSRATIOOFINORDERTOBECLASSIFIEDAShWELLCAPITALIZEDv!DDITIONALLYTHE"ANKSTOTALCAPITALTORISK
35
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUED)
[$ in tables in thousands]
WEIGHTEDASSETSRATIOMUSTEQUALOREXCEEDTOMEETTHESTANDARDFORTHATCLASSIFICATION!T$ECEMBERTHE"ANKS
total capital, net of $0.3 million in treasury stocks, stood at $80.9 million, down $0.1 million from $81.0 million in 2008, and the
"ANKSCAPITALRATIOSAT$ECEMBERCONTINUETOEXCEEDALLOFTHEMINIMUMREGULATORYCAPITALADEQUACYREQUIREMENTS
and allow the Bank to remain classified as “well capitalized” for regulatory purposes.
Capital Adequacy
Total Capital to Risk Weighted Assets ($)
Ratio (%)
Tier 1 Capital to Risk Weighted Assets ($)
Ratio (%)
Tier 1 Capital to Average Assets ($)
Ratio (%)
2009
Minimum
to be
Adequately
Capitalized
Minimum
to be
Well
Capitalized
Actual
%
%
8.00%
10.00%
4.00%
6.00%
4.00%
5.00%
$ 89,227
14.95%
$ 81,767
13.70%
$ 81,767
8.07%
Off-Balance Sheet Arrangements
)N THE ORDINARY COURSE OF BUSINESS THE "ANK ENTERS INTO AGREEMENTS TO EXTEND CREDIT TO ITS CUSTOMERS COMPRISED OF LOAN
commitments and letters of credit. These arrangements are subject to the same credit criteria as the on-balance sheet loans
OFTHE"ANKANDEXPOSETHE"ANKTOAPOTENTIALRISKOFCREDITLOSSREPRESENTEDBYTHECONTRACTUALAMOUNTSOFTHEAGREEMENTS
(OWEVERBECAUSESOMEOFTHESEAGREEMENTSMAYEXPIREWITHOUTBEINGEXERCISEDTHE"ANKSNEEDFORCASHTOFUNDTHEMMAY
BELESSTHANTHEFULLAMOUNTSARRANGED!T$ECEMBER#OMMITMENTSTOEXTENDCREDITTOTALEDMILLIONDOWN
million from $98.6 million in 2008. Total Letters of Credit outstanding, on the other hand, increased by $6.2 million to $23.8
million, up from $17.6 million in 2008. The Bank does not anticipate any material losses associated with these off-balance
arrangements.
Off-Balance Sheet Items
2009
2008
$ Change
% Change
Commitments to Extend Credit
Letters of Credit:
Standby Letters of Credit
Other Letters of Credit
$ 62,143
$ 98,645
$ (36,502)
(37.0%)
$ 21,003
2,792
$ 16,384
1,167
$
4,619
1,625
28.2%
139.2%
$ 23,795
$ 17,551
$
6,244
35.6%
Total Letters of Credit
Contractual Obligations
The Bank utilizes facilities, equipment and land under various operating leases with terms ranging from 1 to 99 years. Some
OFTHESELEASESINCLUDESCHEDULEDRENTINCREASES4HETOTALAMOUNTOFTHERENTISBEINGDEBITEDTOEXPENSEONTHESTRAIGHTLINE
METHODOVERTHETERMSOFTHELEASESINACCORDANCEWITH3&!3.O4HE"ANKHASRECORDEDADEFERREDOBLIGATIONOFMILlion and $0.4 million as of December 31, 2009 and 2008, respectively, which has been included under other liabilities, to reflect
THEEXCESSOFRENTEXPENSEOVERCASHPAIDONTHELEASES
The Bank leases certain facilities from two separate entities in which two of its directors have separate ownership interests.
,EASEPAYMENTSMADETOTHESEENTITIESDURINGEACHOFTHEYEARSENDED$ECEMBERANDWEREAPPROXIMATELY
million.
Payments due by period
Total
36
Long-term debt obligations
Capital lease obligations
Operating lease obligations
Purchase obligations
Other long-term liabilities
Total
$
26,685
$ 26,685
Less than
1 Year
$
1,786
$ 1,786
1 to 3
Years
$
2,326
$ 2,326
3 to 5
Years
$
1,594
$ 1,594
More than
5 Years
$
19,979
$ 19,979
(CONTINUED)
[$ in tables in thousands]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Impact of Inflation and Changing Prices
The Bank’s financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America, which require the measurement of financial position and operating results in terms of historical dollars
without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation
can be found in the increased cost of the Bank’s operations. Nearly all of our assets and liabilities are financial, unlike most
industrial companies. As a result, the Bank’s performance is directly impacted by changes in interest rates, which are indirectly
INFLUENCEDBYINFLATIONANDINFLATIONARYEXPECTATIONS/URABILITYTOMATCHTHEFINANCIALASSETSTOTHEFINANCIALLIABILITIESINOUR
asset/liability management tends to minimize the effect of a change of interest rates on our performance.
Forward-Looking Statements
7HENUSEDINTHISFILINGANDINFUTUREFILINGSBYTHE"ANKWITHTHE&EDERAL$EPOSIT)NSURANCE#ORPORATIONINOURPRESSRELEASES
OROTHERPUBLICORSTOCKHOLDERCOMMUNICATIONSORINORALSTATEMENTSMADEWITHTHEAPPROVALOFANAUTHORIZEDEXECUTIVEOFFICER
THEWORDSORPHRASEShWOULDBEvhWILLALLOWvhINTENDSTOvhWILLLIKELYRESULTvhAREEXPECTEDTOvhWILLCONTINUEvhISANTICIPATEDvhESTIMATEvhPROJECTvORSIMILAREXPRESSIONSAREINTENDEDTOIDENTIFYhFORWARDLOOKINGSTATEMENTSvWITHINTHEMEANING
of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but
not limited to changes in economic conditions in our market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in our market area and competition, all or any of which could cause actual results to differ
materially from historical earnings and from those presently anticipated or projected.
The Bank wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as
of the date made, and advises readers that various factors, including regional, national and international economic conditions,
substantial changes in the levels of market interest rates, credit and other risks of lending and investment activities, competition and regulatory factors, could affect our financial performance and could cause our actual results for future periods to differ
materially from those anticipated or projected.
The Bank does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such statements.
37
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUED)
[$ in thousands, except per share data, unaudited]
SUMMARY OF FINANCIAL CONDITION
2009
Assets:
Cash and due from banks
Federal funds sold
Interest bearing deposits with banks
Investment securities
Loans
Less allowance for possible loan losses
Net loans
Bank premises and equipment
Accrued interest receivable and other assets
Total assets
Liabilities and Stockholders’ Equity:
Deposits
Non-interest bearing
Interest bearing
Total deposits
Accrued interest payable and other liabilities
Federal Home Loan Bank advances
Federal funds purchased
Total liabilities
Stockholders’ Equity:
Capital stock of $0.2083 par value
Authorized 48,000,000 shares at 8,701,663 shares
issued/8,669,487 shares outstanding in 2009 and
8,667,682 shares issued/8,635,506 shares
outstanding in 2008
Capital surplus
Treasury stock
Retained earnings
Accumulated other comprehensive (loss) income
Total stockholders’ equity
Total liabilities and stockholders’ equity
38
As of December 31,
2008
2007
2006
2005
$ 25,748
26,738
278,891
$ 28,070
55,000
10,175
211,537
$ 22,937
18,400
10,202
289,014
$ 27,691
36,000
7,702
254,492
$ 30,991
17,400
7,201
294,468
559,192
8,895
525,111
9,943
454,842
9,000
423,363
8,891
409,785
8,655
550,297
515,168
445,842
414,472
401,130
20,639
38,259
22,571
15,756
23,498
19,389
23,908
20,224
24,540
18,998
$940,572
$858,277
$829,282
$784,489
$794,728
$213,292
598,602
$205,333
534,330
$193,742
542,422
$178,722
515,565
$194,262
514,817
811,894
739,663
736,164
694,287
709,079
2,783
35,000
10,000
2,600
35,000
–
4,554
10,000
–
4,843
10,000
–
6,014
10,000
–
$859,677
$777,263
$750,718
$709,130
$725,093
1,820
13,357
(290)
67,789
(1,781)
1,813
13,097
(290)
66,616
(222)
1,801
12,839
(290)
64,719
(505)
1,792
12,595
–
62,453
(1,481)
2,079
14,154
(15,331)
70,603
(1,870)
80,895
81,014
78,564
75,359
69,635
$940,572
$858,277
$829,282
$784,489
$794,728
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUED)
[$ in thousands, except per share data, unaudited]
SUMMARY OF OPERATIONS
2009
Interest income:
Loans
Investment securities
Federal funds sold
Interest on deposits with banks
Years ended December 31,
2008
2007
2006
2005
$ 40,572
8,529
46
477
$ 37,413
11,568
636
404
$ 39,571
12,671
1,602
425
$ 37,666
11,112
1,352
363
$ 31,374
9,573
782
209
49,624
50,021
54,269
50,493
41,938
1,692
6,228
1,105
4,640
4,022
1,181
7,055
4,843
524
5,747
3,985
460
3,406
2,384
458
9,025
9,843
12,422
10,192
6,248
Net interest income
40,599
40,178
41,847
40,301
35,690
Provision for loan losses
2,550
2,400
929
2,050
1,841
38,049
37,778
40,918
38,251
33,849
4,265
2,718
5,171
3,854
1,450
5,414
4,103
75
5,808
3,733
–
5,680
4,605
–
5,295
12,154
10,718
9,986
9,413
9,900
18,839
5,673
5,505
12,757
18,047
5,740
4,885
11,206
17,419
5,288
4,481
11,606
15,232
5,128
4,286
9,445
13,618
5,080
4,305
10,188
42,774
39,878
38,794
34,091
33,191
Income before income taxes
7,429
8,618
12,110
13,573
10,558
Income tax expense
1,928
2,409
3,622
4,063
3,425
Net income
$ 5,501
$ 6,209
$ 8,488
$ 9,510
$ 7,133
Earnings per share
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
Total interest income
Interest expense:
Time deposits
Savings deposits
Other borrowed funds
Total interest expense
Net interest income, after provision for
loan losses
Non-interest income:
Service charges and fees
Investment securities gains, net
Other income
Total non-interest income
Non-interest expenses:
Salaries and employee benefits
Net occupancy
Furniture and equipment
General, administrative and other expenses
Total non-interest expenses
0.63
0.62
0.72
0.70
0.99
0.96
1.11
1.08
0.83
0.81
39
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUED)
[$ in thousands, unaudited]
SUMMARY OF AVERAGE BALANCES AND INTEREST RATES
Assets
Earning Assets
Due from Banks - Time
2009
Avg. Balance Avg. Rate
2008
Avg. Balance Avg. Rate
$
$
Securities
U.S. Government Securities
Other Securities
Total Securities
Federal Funds Sold
Loans
Commercial, Industrial & Government
Real Estate
Consumer
Total Loans
Total Earning Assets
Non-Earning Assets
Cash and Due from Banks - Demand
Bank Premises and Equipment
Other Real Estate Owned
Other Assets
Allowance for Loan Losses
Total Assets
1.32%
11,797
3.52%
209,660
71,679
281,339
3.95%
3.25%
3.77%
243,289
49,508
292,797
4.26%
5.67%
4.50%
31,570
0.15%
31,582
1.80%
375,318
80,648
97,207
6.38%
6.24%
9.58%
329,696
74,792
82,725
6.93%
6.43%
9.93%
553,173
6.92%
487,213
7.37%
883,408
5.57%
823,389
6.08%
52,219
21,537
1,621
14,362
(9,589)
30,870
23,520
361
13,586
(9,864)
$
963,558
$
343,922
306,782
1.28%
1.16%
650,704
31,156
-
Total Interest Paying Liabilities
681,860
Non-Interest Paying Liabilities and Equity
Demand Deposits
Other Liabilities
Stockholders’ Equity
194,410
5,262
82,026
Liabilities and Stockholders’ Equity
Interest Paying Liabilities - Deposits
Demand and Savings
Time Certificates
Total Time and Savings Deposits
Other Borrowed Funds
Subordinated Debt
Total Liabilities and Stockholders’ Equity
Rate Differential
40
17,326
$
$
881,862
$
293,086
278,416
0.85%
2.18%
1.23%
3.44%
0.00%
571,502
31,615
-
1.50%
3.68%
0.00%
1.33%
603,117
1.61%
196,032
4,650
78,063
963,558
$
4.24%
881,862
4.46%
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUED)
[$ in thousands, unaudited]
2007
Avg. Balance
Avg. Rate
Earning Assets:
$
9,614
4.74%
254,148
23,302
277,450
2006
Avg. Balance
Avg. Rate
$
8,499
4.49%
4.19%
6.73%
4.40%
262,452
11,498
273,950
29,548
5.06%
286,125
72,105
76,706
2005
Avg. Balance
Avg. Rate
$
7,379
3.22%
4.50%
6.24%
4.57%
279,634
47
279,681
3.57%
4.77%
3.57%
26,313
4.92%
23,674
3.25%
8.72%
6.81%
10.19%
262,788
73,313
78,507
8.78%
6.43%
10.34%
233,568
78,163
84,352
7.08%
6.39%
10.25%
434,938
8.67%
414,608
8.66%
396,083
7.62%
751,548
6.90%
723,370
6.93%
706,817
5.82%
Loans:
Assets:
26,628
23,801
752
22,054
(9,641)
22,829
24,109
1,391
20,350
(9,017)
$
815,142
$
287,978
249,989
1.11%
3.53%
537,967
10,000
547,967
27,740
24,849
4,770
20,127
(9,258)
$
783,032
$
775,045
$
302,976
216,965
0.96%
3.20%
$
300,294
198,625
0.62%
2.04%
2.23%
5.25%
0.00%
519,941
10,000
-
1.90%
4.69%
0.00%
498,919
10,000
1,250
1.19%
4.12%
1.80%
2.29%
529,941
1.95%
510,169
1.25%
Equity:
Deposits
& Equity
186,248
5,602
75,325
$
Rate Dif
174,355
6,247
72,489
815,142
$
4.98%
191,377
5,273
68,226
783,032
$
4.98%
775,045
4.58%
41
SENIOR MANAGEMENT, HEADQUARTERS & BRANCH OFFICIALS
Senior Management
Lourdes A. Leon Guerrero
PRESIDENT, CEO AND CHAIR OF THE BOARD
William D. Leon Guerrero
EXECUTIVE VICE PRESIDENT, CHIEF OPERATING
OFFICER AND VICE CHAIRMAN OF THE BOARD
Francisco M. Atalig
SENIOR VICE PRESIDENT/CHIEF FINANCIAL OFFICER
Jocelyn B. Miyashita
SENIOR VICE PRESIDENT/CHIEF CREDIT OFFICER
Josephine L. Mariano
SENIOR VICE PRESIDENT/BRANCH, CENTRAL
OPERATIONS & BSA ADMINISTRATOR
Danilo M. Rapadas
SENIOR VICE PRESIDENT/GENERAL COUNSEL AND
CHIEF RISK OFFICER
Jacqueline A. Marati
SENIOR VICE PRESIDENT/MARKETING
ADMINISTRATOR
Ernest P. Villaverde
SENIOR VICE PRESIDENT/INFORMATION
MANAGEMENT SYSTEMS ADMINISTRATOR
Joseph P. Bradley
SENIOR VICE PRESIDENT/ECONOMIC AND MARKET
STATISTICS OFFICER
Josephine L. Blas
SENIOR VICE PRESIDENT/CHIEF AUDIT EXECUTIVE
Headquarters Officials
Lori C. Sablan
VICE PRESIDENT/ACCOUNTING MANAGER
Janice R. Chargualaf
VICE PRESIDENT/RISK OFFICER & COMPLIANCE
MANAGER
Wayne S.N. Santos
VICE PRESIDENT/MARKETING MANAGER
Luke M. Elliott
VICE PRESIDENT/ELECTRONIC DATA PROCESSING
MANAGER
Mark D. Terlaje
VICE PRESIDENT/PRODUCT AND INFORMATION
MANAGEMENT SYSTEMS MANAGER
Theresa C. Obispo
VICE PRESIDENT/HUMAN RESOURCES MANAGER
Ann M. Roth
VICE PRESIDENT/FINANCIAL SERVICES OFFICER
Frances M. Okougbo
VICE PRESIDENT/TRUST DEPARTMENT MANAGER
J. John P. Ibanez
VICE PRESIDENT/EXECUTIVE DEVELOPMENT
OFFICER
Regional, Branch and
Facility Managers
Romeo A. Angel
VICE PRESIDENT/DEDEDO BRANCH MANAGER
Katherine B. Martir
ASSISTANT VICE PRESIDENT/YIGO BRANCH
MANAGER
Elaine J. Lizama
ASSISTANT VICE PRESIDENT/ANDERSEN AFB
BRANCH MANAGER
Merced M. Tomokane
VICE PRESIDENT/CNMI REGIONAL MANAGER
Larry A. Phillip
ASSISTANT VICE PRESIDENT/SAIPAN BRANCH
MANAGER
Sayuri N. Mai
ASSISTANT CASHIER/SAIPAN PRICE-COSTCO
IN-STORE FACILITY MANAGER
Teresa U. Palacios
ASSISTANT CASHIER/SAIPAN SAN ANTONIO
FACILITY MANAGER
Marilyn L. Mendiola
ASSISTANT CASHIER/TINIAN FACILITY MANAGER
Vicente S. Agulto
ASSISTANT VICE PRESIDENT/ROTA BRANCH
MANAGER
Christine B. Quichocho
VICE PRESIDENT/GUAM CENTRAL-SOUTHERN
REGIONAL MANAGER
Mike W. Naholowaa
VICE PRESIDENT/FSM, RMI & ROP REGIONAL
MANAGER
Renee C. Wade
VICE PRESIDENT/HAGÅTÑA BRANCH MANAGER
John T.M. Sarmiento
ASSISTANT VICE PRESIDENT/SANTA CRUZ
BRANCH MANAGER
Vida B. Ricafrente
VICE PRESIDENT/POHNPEI BRANCH MANAGER
Joanne H. Akinaga
ASSISTANT VICE PRESIDENT/CHUUK BRANCH
MANAGER
Daniel F. Anderson
Richard G. Camacho
Kalistus D. Rengiil
Jennifer B. Sanchez
VICE PRESIDENT/OTHER REAL ESTATE OWNED
VICE PRESIDENT/CORPORATE BANKING GROUP
MANAGER
Jacqueline Ann Hocog
VICE PRESIDENT/MORTGAGE BANKING GROUP
MANAGER
Jessica L.G. Diaz
VICE PRESIDENT/RETAIL BANKING GROUP
MANAGER
Carmelita M. Cruz
VICE PRESIDENT/LOAN ADJUSTMENT MANAGER
Beatrice T. Pereda
VICE PRESIDENT/ASSISTANT CENTRAL OPERATIONS
ADMINISTRATOR
Kathrine C. Lujan
VICE PRESIDENT/BSA MANAGER
Bernadine Q. Pereda
VICE PRESIDENT/LOAN SUPPORT MANAGER
Dawn M. Erwin
42
ASSISTANT VICE PRESIDENT/BUSINESS SERVICES
DIVISION MANAGER
VICE PRESIDENT/TAMUNING BRANCH MANAGER
Katherine R. Lujan
ASSISTANT VICE PRESIDENT/PALAU BRANCH
MANAGER
ASSISTANT VICE PRESIDENT/MANGILAO BRANCH
MANAGER
Rose A. Reyes
ASSISTANT CASHIER/MALESSO BRANCH
MANAGER
Julie A. Gogue
ASSISTANT CASHIER/NAVAL STATION BRANCH
MANAGER
Keven F. Camacho
VICE PRESIDENT/GUAM NORTHERN REGIONAL
Lisa M. Leon Guerrero
ASSISTANT VICE PRESIDENT/MAJURO BRANCH
MANAGER
Steven J. Alcantara
ASSISTANT VICE PRESIDENT/YAP BRANCH
MANAGER
Mary A. Simmering
ASSISTANT VICE PRESIDENT/KOSRAE BRANCH
MANAGER
MANAGER
Joaquin P.L.G. Cook
ASSISTANT VICE PRESIDENT/UPPER TUMON
BRANCH MANAGER AND MEMBER, BOARD OF
DIRECTORS
David J. Arriola
VICE PRESIDENT/TUMON BAY BRANCH MANAGER
Joseph D. Cruz
VICE PRESIDENT/HARMON BRANCH MANAGER
Shirley N. Quitugua
VICE PRESIDENT/SAN FRANCISCO BRANCH
MANAGER
BOARD OF DIRECTORS
Lourdes A. Leon Guerrero
William D. Leon Guerrero
Martin D. Leon Guerrero
Roger P. Crouthamel
s "ANKOF'UAM0RESIDENT#%/AND
Chair of the Board
s #HAIR%XECUTIVE,OANAND4AX
Recovery Committees
s 3ENATORRDTHTHTHAND
28th Guam Legislatures
s -EMBER'UAM.URSES!SSOCIATION
s -EMBER'UAM-EMORIAL(OSPITAL
Board of Trustees
s -EMBER4ELEGUAM,,#"OARDOF
Directors
s "ANKOF'UAM6ICE#HAIRMANOF
the Board
s "ANKOF'UAM%XECUTIVE6ICE
President and Chief Operating
Officer
s#HAIRMAN!SSET,IABILITY
Committee
s 6ICE#HAIRMAN%XECUTIVE,OAN
and Tax Recovery Committees
s 2EGENT5NIVERSITYOF'UAM
s"ANKOF'UAM"OARD4REASURERAND
Assistant Secretary
s #HAIRMAN4RUST#OMMITTEE
s 6ICE#HAIRMAN!UDIT#OMMITTEE
Nominating Committee
s 0RESIDENT)GNACIA#ORPORATION
s 3ECRETARY4REASURER!DZTECH
Public Relations, Inc.
s "ANKOF'UAM"OARD3ECRETARY
s #HAIRMAN3TOCK/PTION#OMMITTEE
& Adhoc Committee
s 6ICE#HAIRMAN4RUST#OMMITTEE
s !TTORNEYAT,AW
s $IRECTOR4RANSPACIFIC4RAVELDBA
Travel Pacificana
s $IRECTOR'UAM&AST&OODSDBA
Kentucky Fried Chicken
s $IRECTORAND6ICE0RESIDENT3PORTS
Concepts, Inc.
Joe T. San Agustin
Ralph G. Sablan, M.D.
Luis G. Camacho, D.D.S., M.S.
Frances L.G. Borja
s #HAIRMAN!UDIT#OMMITTEE
and Nominating Committee
s 3PEAKERTHSTANDND'UAM
Legislatures
s 3ENATORTHRD'UAM
Legislatures
s )NSTRUCTOR5NIVERSITYOF'UAM
s #HAIRMAN'OVERNMENTOF'UAM
Retirement Fund
s&ORMER$IRECTOR$EPARTMENTOF
Administration, Bureau of Budget
and Management Research
s 53.AVY#APTAIN2ETIRED
s &ORMER0RESIDENT'UAM-EDICAL
Society
s$ERMATOLOGIST2ETIRED
s 6ICE#HAIRMAN3TOCK/PTION
Committee
s 0AST0RESIDENT'UAM$ENTAL
Society
s 0AST-EMBER'UAM$ENTAL"OARD
s /RTHODONTIST2ETIRED
s 0RESIDENT#ARMEN3AFEWAY
Enterprises, Inc.
Joaquin P.L.G. Cook
Joseph “Joey” Crisostomo
Patricia P. Ada
s "ANKOF'UAM!SSISTANT6ICE
President/Upper Tumon Branch
Manager
s 0ARTNER"YERLY#OOK#OMPANY
s 6ICE0RESIDENT'UAM(EALTHCARE
and Hospital Development
Foundation
s6ICE#HAIRMAN!SSET,IABILITY
Committee
s 0RESIDENT#ARS0LUS,,#
s0RESIDENT#YCLES0LUS,,#
s0RESIDENT2ENTALS0LUS,,#DBA
Payless Car Rental
s)MMEDIATE0AST#HAIRMAN!RMED
Forces Committee, Guam
Chamber of Commerce
s 'ENERAL-ANAGER"OARD3ECRETARY
and Assistant Treasurer, Ada’s
Trust and Investment, Inc.
s-ANAGER0AND-,,0
s-ANAGER00!DA)NVESTMENT
T
he Guam quarter reverse design depicts the outline of
our island, a flying proa (a sea-going craft built by the
Chamorro people), a latte stone (an architectural element
used as the base of homes) and the inscriptions, GUAM and
Guahan I Tanó ManChamorro, which means “Guam - Land
of the Chamorro.” The proa represents the endurance, fortitude and discovery of the Chamorro people. The vessel,
made by expert carvers and sailed by master navigators, is
admired as a technical marvel. The latte speaks to an historic icon that hails from the Micronesian area. Chamorro is
one of the official languages of Guam, and its use is enjoying
a renaissance here and in the Mariana Islands.
T
he Northern Mariana Islands quarter reverse design
represents the wealth of the islands in their natural resources of land, air and sea. Near the shore stands a large
limestone latte, the supporting column of ancient indigenous Chamorro structures. A canoe of the indigenous
Carolinians represents the people’s seafaring skills across
vast distances. Two white fairy tern birds fly in characteristic synchrony overhead. A Carolinian mwar (head lei)
composed of plumeria, langilang (Ylang Ylang), angagha
(peacock flower) and teibwo (Pacific Basil) borders the
bottom of the design near the inscription NORTHERN
MARIANA ISLANDS. The mwar is symbolic of the virtues
of honor and respect.
®
Member FDIC