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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

September 30, 2011 For the quarterly period ended September 30, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             .

Commission file number: 000-54483

 

 

BankGuam Holding Company

(Exact name of registrant as specified in its charter)

 

 

 

Guam   66-0770448

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

P.O. Box BW

Hagatna, Guam 96910

(671) 472-5300

(Address, including Zip Code, and telephone number, including area code, of the registrant’s principal executive offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registration was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    ¨   Accelerated filer   ¨
Non-accelerated filer    ¨   Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of October 31, 2011, the registrant had outstanding 8,775,447 shares of common stock.

 

 

 


Table of Contents

BANKGUAM HOLDING COMPANY

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

 

PART 1. FINANCIAL INFORMATION

   4  
Item 1.   Condensed Consolidated Financial Statements (Unaudited)      4   
  Condensed Consolidated Statement of Condition      5   
  Condensed Consolidated Statements of Income      6   
  Condensed Consolidated Statements of Stockholders’ Equity      7   
  Condensed Consolidated Statements of Cash Flows      8   
  Notes to Condensed Consolidated Financial Statements (Unaudited)      9   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   
Item 4.   Controls and Procedures      49   
PART II. OTHER INFORMATION      50   
Item 6.   Exhibits      50   
Signatures      51   

 

2


Table of Contents

Cautionary Note on Forward-Looking Statements

For purposes of this Quarterly Report, the terms “we”, “us” and “our” refer to BankGuam Holding Company and its consolidated subsidiaries. This Quarterly Report on Form 10-Q contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These include, among other things statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may be preceded by, followed by or include the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “ is designed to” and similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about our business that could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” included in documents we file from time to time with the U.S. Securities and Exchange Commission (SEC), including our Annual Report Form 10-K for our fiscal year ended December 31, 2011 and our other Quarterly Reports on Form 10-Q to be filed by us in our fiscal year 2012.

We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. New information, future events or risks could cause the forward-looking events we discuss in this Quarterly Report not to occur. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Quarterly Report.

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

The financial statements and the notes thereto begin on the next page.

 

4


Table of Contents

BankGuam Holding Company

Unaudited Condensed Consolidated Statements of Condition

(Dollar Amounts in Thousands)

 

      September 30, 2011     December 31, 2010  
ASSETS     

Cash and due from banks

   $ 33,701      $ 32,102   

Federal funds sold

     5,000        10,000   

Interest bearing deposits in banks

     83,809        59,376   
  

 

 

   

 

 

 

Total cash and cash equivalents

     122,510        101,478   

Interest bearing deposits in banks

     150        1,150   

Investment securities available for sale

     259,744        191,312   

Investment securities held to maturity

     50,527        28,366   

Federal Home Loan Bank stock, at cost

     2,198        2,198   

Loans, net of allowance for loan losses (9/30/11: $10,208 and 12/31/10: $9,408)

     610,396        611,139   

Accrued interest receivable

     3,348        6,723   

Premises and equipment, net

     17,816        18,713   

Goodwill

     783        783   

Other assets

     35,755        28,739   
  

 

 

   

 

 

 
   $ 1,103,227      $ 990,601   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Liabilities:

    

Deposits:

    

Non-interest bearing

   $ 254,875      $ 232,956   

Interest bearing

     746,323        656,319   
  

 

 

   

 

 

 

Total deposits

     1,001,198        889,275   

Accrued interest payable

     286        233   

Federal Home Loan Bank advances

     10,000        15,000   

Other liabilities

     3,021        1,741   
  

 

 

   

 

 

 

Total liabilities

     1,014,505        906,249   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock $0.2083 par value; 48,000 shares authorized; 8,807 and 8,747 shares issued and 8,775 and 8,715 shares outstanding at 9/30/11 and 12/31/10, respectively

     1,835        1,830   

Additional paid-in capital

     14,088        13,683   

Retained earnings

     71,976        70,532   

Accumulated other comprehensive income (loss)

     1,113        (1,403
  

 

 

   

 

 

 
     89,012        84,642   

Common stock in treasury, at cost (32 shares)

     (290     (290
  

 

 

   

 

 

 

Total stockholders’ equity

     88,722        84,352   
  

 

 

   

 

 

 
   $ 1,103,227      $ 990,601   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).

 

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Table of Contents

BankGuam Holding Company

Unaudited Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share and Share Data)

 

     Three months ended September 30,      Nine months ended September 30,  
     2011      2010      2011      2010  

Interest income:

           

Loans

   $ 10,974       $ 11,520         33,480       $ 31,934   

Investment securities

     1,532         1,211         4,244         4,452   

Federal funds sold

     2         3         7         10   

Deposits with banks

     93         118         303         462   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     12,601         12,852         38,034         36,858   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Time deposits

     122         161         351         538   

Savings deposits

     1,218         1,110         3,537         3,653   

Other borrowed funds

     101         140         330         435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     1,441         1,411         4,218         4,626   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     11,160         11,441         33,816         32,232   

Provision for loan losses

     1,275         750         3,225         2,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income, after provision for loan losses

     9,885         10,691         30,591         30,007   

Non-interest income:

           

Service charges and fees

     995         907         3,086         2,889   

Other income

     1,998         2,304         5,995         6,006   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     2,993         3,211         9,081         8,895   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expenses:

           

Salaries and employee benefits

     5,571         4,919         16,269         14,662   

Occupancy

     1,610         1,459         4,488         4,239   

Furniture and equipment

     1,151         1,105         3,590         3,870   

General, administrative and other

     2,953         2,960         9,302         9,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expenses

     11,285         10,443         33,649         32,054   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,593         3,459         6,023         6,848   

Income tax expense

     318         865         1,272         1,731   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,275       $ 2,594       $ 4,751       $ 5,117   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.15       $ 0.30       $ 0.54       $ 0.59   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.15       $ 0.29       $ 0.54       $ 0.58   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends Declared Per Share

   $ 0.125       $ 0.125       $ 0.375       $ 0.375   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Weighted Average Shares

     8,773         8,699         8,744         8,686   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Weighted Average Shares

     8,784         8,824         8,748         8,811   
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).

 

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Table of Contents

BankGuam Holding Company

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(Dollar Amounts in Thousands)

 

     Total     Common
Stock
     Paid-in
Capital
     Accumulated
Other
Comprehensive
Income/(loss)
    Retained
Earnings
    Treasury
Stock
    Comprehensive
Income
 

Balances, December 31, 2010

   $ 84,352      $ 1,830       $ 13,683       ($ 1,403   $ 70,532      ($ 290  

Comprehensive income:

                

Net income

     4,751        0         0         0        4,751        0      $ 4,751   

Other comprehensive income, net of tax:

                

Unrealized gain on available for sale securities

     2,516        0         0         2,516        0        0        2,516   
                

 

 

 

Comprehensive income

                 $ 7,267   

Issuances under Employee Share Purchase Plan

     410        5         405         0        0        0     

Cash dividends on common stock

     (3,307     0         0         0        (3,307     0     

Balances, September 30, 2011

   $ 88,722      $ 1,835       $ 14,088       $ 1,113      $ 71,976      ($ 290  

Balances, December 31, 2009

   $ 80,895      $ 1,820       $ 13,357       ($ 1,781   $ 67,789      ($ 290  

Comprehensive income:

                

Net income

     5,117        0         0         0        5,117        0      $ 5,117   

Other comprehensive income, net of tax:

                

Unrealized gain on available for sale securities

     2,123        0         0         2,123        0        0        2,123   
                

 

 

 

Comprehensive income

                 $ 7,240   

Issuances under Employee Share Purchase Plan

     247        7         240         0        0        0     

Cash dividends on common stock

     (3,260     0         0         0        (3,260     0     

Balances, September 30, 2010

   $ 85,122      $ 1,827       $ 13,597       $ 342      $ 69,646      ($ 290  

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).

 

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BankGuam Holding Company

Unaudited Condensed Consolidated Statements of Cash Flows

 

     Nine months ended September 30,  
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 4,751      $ 5,117   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Provision for loan losses

     3,225        2,225   

Depreciation and amortization

     2,230        2,286   

Amortization of fees, discounts and premiums

     1,296        1,267   

Writedown and loss on sales of foreclosed assets, net

     112        125   

(Increase) decrease in mortgage servicing rights

     (80     42   

Realized gain on sale of available-for-sale securities

     (667     (1,854

Gain on disposal of premises and equipment

     (87     (17

Net change in:

    

Accrued interest receivable

     3,375        (1,241

Other assets

     (8,568     1,104   

Accrued interest payable

     53        (125

Other liabilities

     1,278        1,305   
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,918        10,234   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net change in interest bearing deposits with banks

     1,000        6,150   

Purchases of securities available for sale

     (247,495     (164,400

Proceeds from sales of securities available for sale

     114,713        211,416   

Maturities, prepayments and calls of securities available for sale

     37,370        15,561   

Maturities, prepayments and calls of securities held to maturity

     8,005        6,439   

Loan originations and principal collections, net

     (23,077     (94,325

Proceeds from sales of loans

     20,733        23,534   

Proceeds from sales of foreclosed real estate

     85        50   

Proceeds from sales of premises and equipment

     446        24   

Additions to premises and equipment

     (1,692     (864
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (89,912     3,585   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     111,923        66,269   

Payment of FHLB advances

     (5,000     (20,000

Repayment of Federal funds purchased

     0        (10,000

Proceeds from issuance of common stock

     410        247   

Dividends paid

     (3,307     (3,260
  

 

 

   

 

 

 

Net cash provided by financing activities

     104,026        33,256   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     21,032        47,075   

Cash and cash equivalents at beginning of year

     101,478        46,336   
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 122,510      $ 93,411   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

     4,164      $ 4,752   

Income taxes

     129        243   

Supplemental schedule of noncash investing and financing activities:

    

Foreclosed assets transferred from loans, net

     443      $ 878   

Transfer of foreclosed assets to loans

     (581     (77

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).

 

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Table of Contents

BankGuam Holding Company

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

Note 1 – Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of BankGuamHolding Company (“BankGuam” or “the Company”) and its wholly-owned subsidiary, Bank of Guam (“Bank”). The Company is a Guam corporation organized on August 15, 2011 to act as a holding company of the Bank, a 22 branch bank serving the communities in Guam, the Commonwealth of the Northern Mariana Islands (CNMI), the Federated States of Micronesia (FSM), the Republic of the Marshall Islands (RMI), the Republic of Palau (ROP), and San Francisco, California USA. On August 15, 2011, the Company acquired all of the outstanding common stock of the Bank in a holding company formation transaction.

Other than holding of the shares of the Bank, the Company conducts no significant activities, although it is authorized, with the prior approval of its principal regulator, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) to engage in a variety of activities related to the business of banking. Currently, substantially all of the Company’s operations are conducted and substantially all of the assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses and operating income. The Bank’s headquarters is located in Hagatna, Guam and provides a variety of financial services to individuals, businesses and government entities through its branch network. The Bank’s primary deposit products are demand deposits, savings and time certificates of deposit, and its primary lending products are consumer, commercial and real estate loans. For ease of reference we will sometimes refer to the Company as “we”, “us” or “our.”

All inter company 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 unaudited condensed consolidated financial statements.

Certain information and note disclosures normally included in the Bank’s annual financial statements have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Bank’s Annual Report on Form 10-K for 2010 filed with the Federal Deposit Insurance Corporation on March 14, 2011. In addition to this filing, on August 15, 2011, the Bank filed with the Securities Exchange Commission Form 8-K12G3, in which the Bank’s Annual Report on Form 10-K was included as an exhibit.

The results of operations for the periods ended September 30, 2011 and September 30, 2010 are not necessarily indicative of the operating results of the full year of 2011 or 2010. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of BankGuam’s management, necessary to fairly present the financial position, results of operations and cash flows of BankGuam for the periods presented. Those adjustments consist only of normal recurring adjustments.

The preparation of unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (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 unaudited condensed consolidated financial statements and the reported amounts of income and expenses during the periods presented. Actual 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 foreclosed assets, other-than-temporary impairment of securities, and the fair value of financial instruments.

 

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Earnings Per Common Share

Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Bank relate solely to outstanding stock options, and are determined using the treasury stock method.

Earnings per common share have been computed based on reported net income and the following share data:

 

     Three Months ended September 30,      Nine months ended September 30,  
     2011      2010      2011      2010  

Weighted average number of common shares outstanding

     8,773         8,699         8,744         8,686   

Effect of dilutive options

     11         125         4         125   

Weighted average number of common shares outstanding used to calculate diluted earnings per common Share

     8,784         8,824         8,748         8,811   

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 9. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market condition could significantly affect the estimates.

Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements. The Bank adopted these provisions of this ASU in preparing the Consolidated Financial Statements for the year ended December 31, 2010. The adoption of these provisions, which was subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Bank’s statements of income and condition. See Note 9 for the disclosures required by this ASU.

This ASU also requires that Level 3 activity related to purchases, sales, issuances, and settlements be presented on a gross basis, rather than as a net number as currently permitted. This provision of the ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. As this provision amends only the disclosure requirements for Level 3 fair value measurements, the adoption will have no impact on the Bank’s financial position or results of operations.

Disclosure about the Credit Quality

In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which requires the Company to provide a greater level of disaggregated information about the credit quality of the Company’s loans and leases and the Allowance for Loan and Lease Losses (the “Allowance”).

 

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Table of Contents

This ASU requires the Company to disclose additional information related to credit quality indicators, nonaccrual and past due information, and information related to impaired loans and loans modified in a troubled debt restructuring. The provisions of this ASU became effective for the Company’s reporting period ended on September 30, 2011. As this ASU amends only the disclosure requirements for loans and leases and the Allowance, the adoption did not have any impact on the Company’s statements of income and condition. In January 2011, the FASB issued ASU No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” The amendments in ASU No. 2011-01 deferred the effective date related to disclosures about troubled debt restructurings, enabling creditors to provide such disclosures after the FASB completed their project clarifying the guidance for determining what constitutes a troubled debt restructuring. In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and adds factors for creditors to use in determining whether a borrower is experiencing financial difficulties. ASU No. 2011-02 also ended the FASB’s deferral of the additional disclosures related to troubled debt restructurings as required by ASU No. 2010-20. The provisions of ASU No. 2011-02 are effective for the Company’s reporting period ended September 30, 2011. The adoption of ASU No. 2011-02 did not have an impact on the Company’s statements of income and condition.

Intangibles – Goodwill and Other

In December 2010, the FASB issued ASU No. 2010-28 “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units With Zero or Negative Carrying Amounts”, which requires entities that have one or more reporting units with a zero or negative carrying value to assess, considering qualitative factors, whether it is more likely than not that a goodwill impairment exists. If an entity concludes that it is more likely than not that goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. The Company adopted the provisions of this ASU in preparing the unaudited condensed consolidated financial statements for the period ended September 30, 2011. The adoption of this ASU has had no impact on the Company’s statements of income and condition.

On September 15, 2011, the FASB issued ASU No. 2011-08 “Testing Goodwill for Impairment”, which gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, on the basis of qualitative factors, that it is more likely than not that its fair value is less than the carrying amount. The ASU is effective for all entities for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU No. 2011-02 is not expected to have a material impact on the Company’s statements of income and condition.

Other Recent Accounting Pronouncements

On April 29, 2011, the FASB issued ASU No. 2011-03 “Reconsideration of Effective Control for Repurchase Agreements”, which modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. The ASU eliminates from the assessment of effective control the requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms. This requirement was one of the criteria under ASC 860 that entities

 

11


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used to determine whether the transferor maintained effective control. Although entities must consider all the effective-control criteria under ASC 860, the elimination of this requirement may lead to more conclusions that a repurchase arrangement should be accounted for as a secured borrowing rather than as a sale. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The adoption of ASU No. 2011-03 is not expected to have a material impact on the Company’s statements of income and condition.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The new guidance was issued to provide a consistent definition of fair value and ensure that fair value measurements and disclosure requirements are similar between US GAAP and International Financial Reporting Standards (“IFRS”). The guidance changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements. The adoption of ASU No. 2011-04 is not expected to have a material impact on the Company’s statements of income and condition.

On June 16, 2011, the FASB issued ASU No. 2011-05 “Presentation of Comprehensive Income”, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU No. 2011-05 is not expected to have a material impact on the Company’s statements of income and condition.

Note 2 – Investment Securities

The amortized cost and fair value of investment securities, with gross unrealized gains and losses, follows:

 

     September 30, 2011  
      Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities Available for Sale

          

U.S. government agency and sponsored agencies (GSE) debt securities

   $ 76,925       $ 800       $ (1   $ 77,724   

U.S. government agency pool securities

     9,544         79         (1     9,622   

U.S. government agency or GSE mortgage-backed securities

     170,836         1,809         (247     172,398   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 257,305       $ 2,688       $ (249   $ 259,744   

Securities Held to Maturity

          

U.S. government agency pool securities

   $ 2,243       $ 11       $ (18   $ 2,236   

U.S. government agency or GSE mortgage-backed securities

     48,284         1,714         0        49,998   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 50,527       $ 1,725       $ (18   $ 52,234   

 

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     December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
          
          

Securities Available for Sale

          

U.S. government agency and sponsored agencies (GSE) debt securities

   $ 85,004       $ 131       $ (636   $ 84,499   

U.S. government agency pool securities

     43,732         531         (67     44,196   

U.S. government agency or GSE mortgage-backed securities

     63,822         106         (1,311     62,617   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 192,558       $ 768       $ (2,014   $ 191,312   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

          

U.S. government agency pool securities

   $ 2,784       $ 28       $ (24   $ 2,788   

U.S. government agency or GSE mortgage-backed securities

     25,582         1,489         0        27,071   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 28,366       $ 1,517       $ (24   $ 29,859   
  

 

 

    

 

 

    

 

 

   

 

 

 

At September 30, 2011 and December 31, 2010, investment securities with a carrying value of $123,259 and $124,133, respectively, were pledged to secure various Government deposits and other public requirements.

The amortized cost and fair value of investment securities by contractual maturity at September 30, 2011 and December 31, 2010, follows:

 

     September 30, 2011  
     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
           

Due after one but within five years

   $ 61,962       $ 62,582       $ 0       $ 0   

Due after five years

     14,963         15,142         0         0   

U.S. government agency pool securities

     9,544         9,622         2,243         2,236   

Mortgage-backed securities

     170,836         172,398         48,284         49,998   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 257,305       $ 259,744       $ 50,527       $ 52,234   

 

     December 31, 2010  
     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
           

Due after one but within five years

   $ 85,004       $ 84,499       $ 0       $ 0   

U.S. government agency pool securities

     43,732         44,196         2,784         2,788   

Mortgage-backed securities

     63,822         62,617         25,582         27,071   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 192,558       $ 191,312       $ 28,366       $ 29,859   

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 loss position at September 30, 2011 and December 31, 2010.

 

     September 30, 2011  
     Less Than Twelve Months      Over Twelve Months  
     Unrealized Loss      Fair Value      Unrealized Loss      Fair Value  

Securities Available for Sale

           

U.S. government agency and sponsored agencies (GSE) debt securities

   $ 1       $ 9,994       $ 0       $ 0   

U.S. government agency pool securities

     0         0         1         90   

U.S. government agency or GSE mortgage-backed securities

     247         36,175         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 248       $ 46,169       $ 1       $ 90   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity

           

U.S. government agency pool securities

   $ 0       $ 0       $ 18       $ 1,620   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2010  
     Less Than Twelve Months      Over Twelve Months  
     Unrealized Loss      Fair Value      Unrealized Loss      Fair Value  

Securities Available for Sale

           

U.S. government agency and sponsored agencies (GSE) debt securities

   $ 636       $ 54,364       $ 0       $ 0   

U.S. government agency pool securities

     0         0         67         11,051   

U.S. government agency or GSE mortgage-backed securities

     1,311         55,363         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,947       $ 109,727       $ 67       $ 11,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity

           

U.S. government agency or GSE mortgage-backed securities

   $ 1       $ 18       $ 23       $ 1,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Bank does not believe that the investment securities that were in an unrealized loss position as of September 30, 2011, which comprised a total of 17 securities, were other-than-temporarily impaired. Specifically, the 17 securities are comprised of the following: 8 Small Business Administration (SBA) Pool securities, 2 debt securities issued by Federal National Mortgage Association (FNMA), 3 mortgage-backed securities issued by FNMA, 1 mortgage-backed security issued by Government National Mortgage Association and 3 mortgage-backed securities issued by Federal Home Loan Mortgage Corporation (FHLMC).

Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Bank does not intend to sell the investment securities that were in an unrealized loss position and it is not likely that the Bank will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

Note 3 – Loans

A summary of the balances of loans at September 30, 2011 and December 31, 2010 follows:

 

     September 31, 2011      December 31, 2010  

Commercial

   $ 371,406       $ 368,635   

Consumer

     114,819         112,462   

Real estate

     85,504         88,840   

Government

     48,487         47,904   

Other

     1,777         4,112   
  

 

 

    

 

 

 

Gross loans

     621,993         621,953   

Less: net deferred loan fees

     1,389         1,406   

Less: allowance for loan losses

     10,208         9,408   
  

 

 

    

 

 

 

Net loans

   $ 610,396       $ 611,139   
  

 

 

    

 

 

 

 

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At September 30, 2011 and December 31, 2010, loans to directors and executive officers of the Bank amounted to $19,802 and $15,912, respectively. These loans were extended in the normal course of business and at prevailing interest rates. At September 30, 2011 and December 31, 2010, undisbursed commitments amounted to $7,906 and $7,130, respectively.

Note 4 – 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 historical experience, the nature of volume of the loan portfolio, 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. For those loans that are classified as impaired, an 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 historical charge-off experience and expected loss given default 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 probable 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. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment 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 to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. The Bank performs direct write-down of impaired loans with a charge to the allocated component of the allowance, therefore reducing the allocated component of the reserve to zero at the end of each reporting period.

Impaired loans include loans that are in nonaccrual status and other loans that have been modified in Troubled Debt Restructurings (TDRs), where economic concessions have been granted to borrowers experiencing financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions with the intention to maximize collections.

 

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Table of Contents
(dollars in thousands)    Commercial     Consumer     Total  

Three Months Ended September 30, 2011

      

Allowance for Loan and Lease Losses:

      

Balance at Beginning of Period 1

       $ 9,739   

Loans and Leases Charged-Off

     (142     (958     (1,100

Recoveries on Loans and Leases Previously Charged-Off

     8        286        294   

Net Loans and Leases Charged-Off

     (134     (672     (806

Provision for Credit Losses 1

         1,275   

Balance at End of Period 1

       $ 10,208   

Nine Months Ended September 30, 2011

      

Allowance for Loan and Lease Losses:

      

Balance at Beginning of Period 1

       $ 9,408   

Loans and Leases Charged-Off

     (398     (3,059     (3,457

Recoveries on Loans and Leases Previously Charged-Off

     35        997        1,032   

Net Loans and Leases Charged-Off

     (363     (2,062     (2,425

Provision for Credit Losses 1

         3,225   

Balance at End of Period 1

       $ 10,208   

As of September 30, 2011

      

Allowance for Loan and Lease Losses:

      

Individually Evaluated for Impairment 1

       $ 0   

Collectively Evaluated for Impairment 1

         10,208   

Total

       $ 10,208   

Recorded Investment in Loans and Leases:

      

Individually Evaluated for Impairment

   $ 14,453      $ 2,941      $ 17,394   

Collectively Evaluated for Impairment

     405,440        199,159        604,599   

Total

   $ 419,893      $ 202,100      $ 621,993   

 

1 

It is not currently feasible for the Bank to split these balances between commercial and consumer loans.

Credit Quality Indicators

The Bank uses several credit quality indicators to manage credit risk. The Bank uses an internal credit risk rating system that categorizes loans and leases into pass, special mention, substandard, doubtful or loss categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.

The following are the definitions of the Bank’s credit quality indicators:

Pass (A): Exceptional: Essentially risk free credit. These are loans of the highest quality that pose virtually no risk of loss to the Bank. This includes loans fully collateralized by means of a savings account(s) and time certificate of deposit(s) by at least 110% of the loan amount. Borrowers should have strong financial statements, good liquidity and excellent credit.

Pass (B): Standard: Multiple “strong sources of repayment”. Loans to strong borrowers with demonstrated history of financial and managerial performance. Risk of loss is considered to be low. Loans are well structured with clearly identified primary and readily available secondary sources of repayment. Loans maybe secured by an equal amount of funds in a savings account or time certificate of deposit. Loans may be secured by marketable collateral whose value can be reasonably determined through outside appraisals. Very strong cash flow and relatively low leverage.

Pass (C): Acceptable: “Good” primary and secondary sources of repayment. Loans to borrowers of average financial strength, stability and management expertise. Borrower should be a well established individual or company with adequate financial resources to weather short-term fluctuations in the marketplace. Financial ratios and trends are positive. The loans may be unsecured or supported by non-real estate collateral for which the value is more difficult to determine reasonable credit risk and require an average amount of account officer attention. Unsecured credit is to be of unquestionable strength.

 

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Pass (D): Monitor: “Sufficient” primary source of repayment and acceptable secondary source of repayment. Acceptable business or individual credit, but the borrower’s operations, cash flow or financial conditions evidence moderate to average levels of risk. Loans are considered to be collectable in full but perhaps will require a greater-than-average amount of loan officer attention. Borrowers are capable of absorbing normal setbacks without failure.

Special Mention: A special mention asset has potential weaknesses that deserve close monitoring. These potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Special Mention should neither be a compromise between a pass grade and substandard, nor should it be a “catch all” grade to identify any loan that has a policy exception.

Substandard: A substandard asset is inadequately protected by the current sound worth and payment capacity of the obligor or the collateral pledged. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Formula Classified: Formula classified loans are all loans and credit cards delinquent 90 days and over which have yet to be formally classified, ie., Special Mention, Substandard or Doubtful by the Bank’s Loan Committee. In most instances, the monthly formula total is comprised primarily of real estate and consumer loans and credit cards. Commercial loans are typically formally classified by the Loan Committee no later than their 90-day delinquency, thus do not become part of the formula classification. Real estate loans 90-days delinquent are in the foreclosure process and is typically completed within another 60 days, thus is not formally classified during this period.

Doubtful: A loan with weaknesses well enough defined that eventual liquidation in full, on the basis of currently existing facts, conditions and values, is highly questionable, even though certain factors may be present which could improve the status of the loan. The possibility of loss is extremely high, but because of certain known factors, which may work to the advantage of strengthening of the assets, (i.e. capital injection, perfecting liens on additional collateral, refinancing plans, etc.) its classification as an estimated loss is deferred until its more exact status may be determined.

Loss: Loans classified as “Loss” are considered uncollectible, that are either unsecured or supported by collaterals of little to no value as such their continuance as bankable assets is not warranted. While this classification does not mandate that a loan has no ultimate recovery value, losses should be taken in the period these loans deemed to be uncollectible. Loans identified as loss are immediately approved for charge off. The Bank may refer loans to outside collection agencies, attorneys, or internal collection division to continue collection efforts. Any subsequent recoveries are credited to the Allowance for Loan Losses.

The Bank’s credit quality indicators are periodically updated on a case-by-case basis. The following presents by class and by credit quality indicator, the recorded investment in the Bank’s loans and leases as of September 30, 2011 and December 31, 2010.

 

     September 30, 2011  
     (dollars in thousands)  
     Commercial
and Industrial
     Commercial
Mortgage
     Construction      Lease
Financing
     Total
Commercial
 

Pass

   $ 139,458       $ 218,557       $ 2,130       $ 0       $ 360,145   

Special Mention

     15,423         17,175         0         0         32,598   

Classified (Substandard)

     3,773         16,521         6,856         0         27,150   

Classified (Formula)

     0         0         0         0         0   

Total

   $ 158,654       $ 252,253       $ 8,986       $ 0       $ 419,893   
     (dollars in thousands)  
     Residential
Mortgage
     Home
Equity
     Automobile      Other 1      Total
Consumer
 

Pass

   $ 82,669       $ 1,704       $ 9,534       $ 91,320       $ 185,227   

Pass (Credit Card)

     0         0         0         12,592         12,592   

Classified (Substandard)

     1,120         0         0         0         1,120   

Classified (Formula)

     1,836         0         0         1,325         3,161   

Total

   $ 85,625       $ 1,704       $ 9,534       $ 105,237       $ 202,100   
              

 

 

 

Total Recorded Investment in Loans and Leases

               $ 621,993   

 

1

Comprised of other revolving credit, installment, and overdraft.

 

17


Table of Contents
     December 31, 2010  
     (dollars in thousands)  
     Commercial
and Industrial
     Commercial
Mortgage
     Construction      Lease
Financing
     Total
Commercial
 

Pass

   $ 151,551       $ 214,061       $ 0       $ 0       $ 365,612   

Special Mention

     585         0         0         0         585   

Classified (Substandard)

     11,381         26,850         12,111         0         50,342   

Classified (Formula)

     0         0         0         0         0   

Total

   $ 163,517       $ 240,911       $ 12,111       $ 0       $ 416,539   
     (dollars in thousands)  
     Residential
Mortgage
     Home
Equity
     Automobile      Other 1     

Total

Consumer

 

Pass

   $ 86,305       $ 1,516       $ 0       $ 101,818       $ 189,639   

Pass (Credit Card)

     0         0         0         11,235         11,235   

Classified (Substandard)

     667         0         0         0         667   

Classified (Formula)

     2,140         0         0         1,733         3,873   

Total

   $ 89,112       $ 1,516       $ 0       $ 114,786       $ 205,414   
              

 

 

 

Total Recorded Investment in Loans and Leases

               $ 621,953   

 

1 

Comprised of other revolving credit, installment, and overdraft.

Aging Analysis of Accruing and Non-Accruing Loans and Leases

The following presents by class, an aging analysis of the Bank’s accruing and non-accruing loans and leases as of September 30, 2011 and December 31, 2010.

 

(dollars in thousands)    30 – 59
Days
Past
Due
     60 –89
Days
Past
Due
     Past Due
90 Days
or More
     Non-
Accrual
     Total Past
Due and
Non-Accrual
     Current      Total
Loans
    

Total

Non Accrual
Loans that
are Current 2

 

September 30, 2011

                       

Commercial

                       

Commercial and Industrial

     718         5         194         64         981         157,673         158,654         0   

Commercial Mortgage

     1,724         1,264         0         8,602         11,590         240,663         252,253         1,168   

Construction

     0         0         0         2,478         2,478         6,508         8,986         0   

Total Commercial

     2,442         1,269         194         11,144         15,049         404,844         419,893         1,168   

Consumer

                       

Residential Mortgage

     1,137         742         647         2,839         5,365         80,260         85,625         257   

Home Equity

     96         0         0         0         96         1,608         1,704         0   

Automobile

     289         59         15         0         363         9,171         9,534         0   

Other 1

     2,159         1,235         1,171         102         4,667         100,570         105,237         16   

Total Consumer

     3,681         2,036         1,833         2,941         10,491         191,609         202,100         273   

Total

     6,123         3,305         2,027         14,085         25,540         596,453         621,993         1,441   

December 31, 2010

                       

Commercial

                       

Commercial and Industrial

     399         118         0         381         898         162,619         163,517         142   

Commercial Mortgage

     19         0         0         8,190         8,209         232,702         240,911         2,651   

Construction

     0         0         0         2,982         2,982         9,129         12,111         0   

Total Commercial

     418         118         0         11,553         12,089         404,450         416,539         2,793   

Consumer

                       

Residential Mortgage

     4,271         1,059         0         3,636         8,966         80,146         89,112         136   

Home Equity

     10         0         0         26         36         1,480         1,516         0   

Automobile

     0         0         0         0         0         0         0         0   

Other 1

     2,965         1,736         1,548         95         6,344         108,442         114,786         3   

Total Consumer

     7,246         2,795         1,548         3,757         15,346         190,068         205,414         139   

Total

     7,664         2,913         1,548         15,310         27,435         594,518         621,953         2,932   

 

1

Comprised of other revolving credit, installment, and overdraft.

2

Represents nonaccrual loans that are not past due 30 days or more; however, full payment of principal and interest is still not expected.

 

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Table of Contents

Note 5 – Non-Performing Assets and Impaired Loans

Impaired Loans

The following presents by class, information related to the Bank’s impaired loans as of September 30, 2011 and December 31, 2010.

 

(dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance for
Loan Losses
 

September 30, 2011

        

Impaired Loans with No Related Allowance Recorded:

        

Commercial

        

Commercial and Industrial

     428         463         0   

Commercial Mortgage

     11,547         14,624         0   

Construction

     2,478         4,448         0   

Total Commercial

     14,453         19,535         0   

Consumer

        

Residential Mortgage

     2,839         2,884         0   

Home Equity

     0         0         0   

Automobile

     0         0         0   

Other 1

     102         102         0   

Total Consumer

     2,941         2,986         0   

Total Impaired Loans with No Related Allowance Recorded

     17,394         22,521         0   

Impaired Loans with an Allowance Recorded:

        

Commercial

        

Commercial and Industrial

     0         0         0   

Commercial Mortgage

     0         0         0   

Total Commercial

     0         0         0   

Total Impaired Loans with an Allowance Recorded

     0         0         0   

Impaired Loans:

        

Commercial

     14,453         19,535         0   

Consumer

     2,941         2,986         0   

Total Impaired Loans

     17,394         22,521         0   

December 31, 2010

        

Impaired Loans with No Related Allowance Recorded:

        

Commercial

        

Commercial and Industrial

     381         428         0   

Commercial Mortgage

     11,243         14,297         0   

Construction

     2,982         4,952         0   

Total Commercial

     14,606         19,677         0   

Consumer

        

Residential Mortgage

     3,636         3,728         0   

Home Equity

     26         52         0   

Automobile

     0         0         0   

Other 1

     95         97         0   

Total Consumer

     3,757         3,877         0   

Total Impaired Loans with No Related Allowance Recorded

     18,363         23,554         0   

Impaired Loans with an Allowance Recorded:

        

Commercial

        

Commercial and Industrial

     0         0         0   

Commercial Mortgage

     0         0         0   

Construction

     0         0         0   

Total Commercial

     0         0         0   

Total Impaired Loans with an Allowance Recorded

     0         0         0   

Impaired Loans:

        

Commercial

     14,606         19,677         0   

Consumer

     3,757         3,877         0   

Total Impaired Loans

     18,363         23,554         0   

 

1 

Comprised of other revolving credit and installment financing.

The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2011.

 

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Table of Contents
     Three Months Ended September 30, 2011      Nine Months Ended September 30, 2011  
(dollars in thousands)   

Average

Recorded
Investment

    

Interest

Income
Recognized

     Average
Recorded
Investment
    

Interest

Income
Recognized

 

Impaired Loans with No Related Allowance Recorded:

           

Commercial

           

Commercial and Industrial

     424         8         398         23   

Commercial Mortgage

     10,809         153         10,811         471   

Construction

     2,478         0         2,660         0   

Total Commercial

     13,711         161         13,869         494   

Consumer

           

Residential Mortgage

     2,913         7         3,275         29   

Home Equity

     15         0         23         0   

Automobile

     0         0         0         0   

Other 1

     98         0         95         0   

Total Consumer

     3,026         7         3,393         29   

Total Impaired Loans with No Related Allowance Recorded

     16,737         168         17,262         523   

Impaired Loans with an Allowance Recorded:

           

Commercial

           

Commercial and Industrial

     0         0         0         0   

Commercial Mortgage

     0         0         0         0   

Construction

     0         0         0         0   

Total Commercial

     0         0         0         0   

Total Impaired Loans with an Allowance Recorded

     0         0         0         0   

Impaired Loans:

           

Commercial

     13,711         161         13,869         494   

Consumer

     3,026         7         3,393         29   

Total Impaired Loans

     16,737         168         17,262         523   

 

1 

Comprised of other revolving credit and installment financing.

Note 6 – Commitments and Contingencies

The Bank utilizes facilities, equipment and land under various operating leases with terms ranging from 1 to 99 years. Some of these leases include scheduled rent increases. The total amount of the rent is being charged to expense on the straight-line method over the lease terms in accordance with ASC Topic 840 “Leases.” The Bank has recorded a deferred obligation of $610 and $554 as of September 30, 2011 and December 31, 2010, respectively, which has been included within other liabilities, to reflect the excess of rent expense over cash paid on the leases.

At September 30, 2011, annual lease commitments under the above noncancelable operating leases were as follows:

 

Period ending September 30,

      

2011

   $ 1,609   

2012

     1,190   

2013

     1,051   

2014

     892   

2015

     599   

Thereafter

     19,925   
  

 

 

 
   $ 25,266   
  

 

 

 

The Bank leases certain facilities from two separate entities in which two of its directors have separate ownership interests. Lease payments made to these entities during the periods ended September 30, 2011, and December 31, 2010 approximated $186 and $351, respectively.

 

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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 September 30, 2011, minimum future rents to be received under noncancelable operating sublease agreements were $56 for the period ended September 30, 2012.

A summary of rental activities for periods ended September 30, 2011, and September 30, 2010, is as follows:

 

     September 30,
2011
     September 30,
2010
 

Rent expense

   $ 1,717       $ 1,747   

Less: sublease rentals

     191         204   
  

 

 

    

 

 

 
   $ 1,526       $ 1,543   
  

 

 

    

 

 

 

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 has a material adverse effect on the Bank’s financial position, results of operations or cash flows.

Note 7 – Minimum Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the United States federal banking agencies. Failure 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 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2011 and December 31, 2010, that the Bank met all capital adequacy requirements to which they are subject.

As of September 30, 2011, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for 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 Bank’s actual capital amounts and ratios as of September 30, 2011 and December 31, 2010 are also presented in the table.

 

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Table of Contents
     Actual     For Capital Adequacy
Purposes
    To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of September 30, 2011:

               

Total capital
(to Risk Weighted Assets)

   $ 95,405         13.85   $ 54,414         8.00   $ 68,018         10.00

Tier 1 capital
(to Risk Weighted Assets)

   $ 86,893         12.78   $ 27,207         4.00   $ 40,811         6.00

Tier 1 capital
(to Average Assets)

   $ 86,893         8.24   $ 44,325         4.00   $ 55,406         5.00

As of December 31, 2010:

               

Total capital
(to Risk Weighted Assets)

   $ 93,286         13.76   $ 54,228         8.00   $ 67,785         10.00

Tier 1 capital
(to Risk Weighted Assets)

   $ 84,813         12.21   $ 27,114         4.00   $ 40,671         6.00

Tier 1 capital
(to Average Assets)

   $ 84,813         8.52   $ 39,816         4.00   $ 49,771         5.00

Note 8 – Off-Balance Sheet Activities

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 instruments include commitments to extend credit, standby 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.

The Bank’s exposure to credit loss, in the event of nonperformance 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 September 30, 2011 and December 31, 2010 is as follows:

 

     9/30/11      12/31/10  

Commitments to extend credit

   $ 97,142       $ 94,979   
  

 

 

    

 

 

 

Letters of credit:

     

Standby letters of credit

   $ 25,641       $ 33,072   

Other letters of credit

     674         1,513   
  

 

 

    

 

 

 
   $ 26,315       $ 34,585   
  

 

 

    

 

 

 

Commitments 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 fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for certain lines of credit may expire without being drawn upon. Therefore, 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 management’s credit evaluation of the customer.

 

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Table of Contents

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. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments.

The Bank considers its standby letters of credit to be guarantees. At September 30, 2011, the maximum undiscounted future payments that the Bank could be required to make was $25,641. 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 guarantees are fully collateralized; however, several are unsecured. The Bank had not recorded any liabilities associated with these guarantees at September 30, 2011.

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 $183,554 and $173,505 at September 30, 2011 and December 31, 2010, respectively. On September 30, 2011 and December 31, 2010, the Bank recorded mortgage servicing rights at their fair value of $1,022 and $942, respectively.

At September 30, 2011, loans outstanding were comprised of approximately 75% variable rate loans and 25% fixed rate loans.

Note 9 – Fair Value of 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. In accordance with ASC Topic 820 “Fair Value Measurements and Disclosures,” 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 measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In 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. The 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. If 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. In 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.

Fair Value Hierarchy

In accordance with this guidance, the Bank groups its financial 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.

 

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 securities that are traded in an active exchange market, as well as 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.

 

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Table of Contents
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 based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable 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.

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 short-term nature of the assets.

Interest-Bearing Deposits in Banks

Fair values for other interest-bearing deposits are estimated 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.

If quoted market prices are not available, the Bank estimates 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. Examples 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 included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Bank would classify those securities in Level 3. At September 30, 2011 and December 31, 2010, the Bank did not have any Level 3 securities.

Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

 

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Table of Contents

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

The fair values disclosed for demand deposits (for example, 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). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings

The carrying amounts of federal funds purchased and FHLB advances maturing within ninety days approximate their fair values.

Long-Term Borrowings

Fair value of FHLB advances maturing after ninety days is determined based on expected present value techniques based on current market rates for advances with similar terms and remaining maturities.

Accrued Interest

The 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 attempting to assess the likelihood and timing of a commitment being drawn upon, coupled with a lack of an established market and the wide diversity of fee structures.

Financial assets measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 are as follows:

 

     Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
     Significant
Other Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  

September 30, 2011

           

U.S. government agency and sponsored agencies (GSE) debt securites

   $ 0       $ 77,725       $ 0       $ 77,725   

U.S. government agency pool securities

     0         9,622         0         9,622   

U.S. government agency of GSE

     0         172,397         0         172,397   

Other assets:

           

MSRs

     0         0         1,022         1,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 0       $ 259,744       $ 1,022       $ 260,776   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

           

U.S. government agency and sponsored agencies (GSE) debt securities

   $ 0       $ 84,499       $ 0       $ 84,499   

U.S. government agency pool securities

     0         44,196         0         44,196   

U.S. government agency of GSE

     0         62,617         0         62,617   

Other assets:

           

MSRs

     0         0         942         942   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 0       $ 191,312       $ 942       $ 192,254   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

There are no liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010.

During the periods ended September 30, 2011 and December 31, 2010, the changes in Level 3 assets measured at fair value on a recurring basis are as follows:

 

     9/30/11      12/31/10  

Beginning balance

   $ 942       $ 965   

Realized and unrealized net gains (losses):

     

Included in net income

     80         (23

Included in other comprehensive income

     0         0   

Purchases, sales and issuances, net

     0         0   
  

 

 

    

 

 

 

Ending balance

   $ 1,022       $ 942   
  

 

 

    

 

 

 

There were no transfers in or out of the Bank’s Level 3 financial assets for the periods ended September 30, 2011 and December 31, 2010.

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 September 30, 2011 and December 31, 2010, for which a nonrecurring change in fair value has been recorded:

 

      Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
     Significant
Other  Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total  

September 30, 2011

           

Financial assets:

           

Loans, net

           

Impaired loans

   $ 0       $ 95       $ 0       $ 95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other assets

           

Other real estate owned

   $ 0       $ 0       $ 0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

           

Financial assets:

           

Loans, net

           

Impaired loans

   $ 0       $ 362       $ 0       $ 362   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other assets

           

Other real estate owned

   $ 0       $ 3,354       $ 0       $ 3,354   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

In accordance with the provisions of loan impairment guidance of ASC Subtopic 310-10-35, individual loans with total carrying values of $130 and $453 at September 30, 2011 and December 31, 2010, respectively, were written down to their fair value of $95 and $362, respectively, resulting in an impairment charge of $35 and $91, respectively, which were recorded as charge-offs to the allowance for loan losses. Loans subject to write downs 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.

In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of ASC Subtopic 360–10, foreclosed assets with a carrying amount of $22 and $3,555 at September 30, 2011 and December 31, 2010, respectively, were written down to their fair value of $0 and $3,354, respectively, resulting in a loss of $22 and $201, respectively, which were included in earnings for the period. Foreclosed assets subject to write downs is 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.

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 periods ended September 30, 2011, and December 31, 2010.

Fair Value of Other Financial Instruments

The estimated fair values of the Bank’s other financial instruments, excluding those assets recorded at fair value on a recurring basis on the Bank’s consolidated statements of condition, are as follows:

 

     September 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair
Value
 

Financial assets:

           

Cash and cash equivalents

     122,510         122,510         101,478         101,478   

Interest bearing deposits with banks

     150         150         1,150         1,150   

Investment securities held to maturity

     50,527         52,233         28,366         29,859   

Loans, net of allowance for loan losses

     610,396         625,796         611,139         625,247   

Accrued interest receivable

     3,348         3,348         6,723         6,723   

Financial liabilities:

           

Deposits

     1,001,198         1,001,372         889,275         893,072   

Accrued interest payable

     286         286         233         233   

Federal Home Loan Bank advances

     10,000         10,000         15,000         15,000   

Note 10 – Other Comprehensive Income/(Loss)

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains on securities available for sale and unrealized loss related to factors other than credit in debt securities classified as available for sale, which are also recognized as separate components of equity.

The components of other comprehensive income and related tax effects are as follows:

 

$4,352 000 $4,352 000
     Period Ended September 30,  
     2011     2010  

Unrealized holding gains on available-for-sale securities

   $ 4,352      $ 4,943   

Reclassification adjustment for gains realized in income

     (667     (1,854

Amortization of unrealized holding loss on held-to-maturity securities

     127        127   
  

 

 

   

 

 

 
     3,812        3,216   

Tax effect

     (1,296     (1,093
  

 

 

   

 

 

 

Other comprehensive income, net of tax

   $ 2,516      $ 2,123   
  

 

 

   

 

 

 

 

27


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

BankGuam Holding Company (the “Company”) is a Guam corporation organized on August 15, 2011 to act as a holding company of Bank of Guam (the “Bank”), a 22 branch bank serving the communities in Guam, the Commonwealth of the Northern Mariana Islands (CNMI), the Federated States of Micronesia (FSM), the Republic of the Marshall Islands (RMI), the Republic of Palau (ROP), and San Francisco, California USA. On August 15, 2011, the Company acquired all of the outstanding common stock of the Bank in a holding company formation transaction.

Other than holding of the shares of the Bank, the Company conducts no significant activities, although it is authorized, with the prior approval of its principle regulator, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) to engage in a variety of activities related to the business of banking. Currently, substantially all of the Company’s operations are conducted and substantially all of the assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses and operating income. The Bank’s headquarters is located in Hagatna, Guam and provides a variety of financial services to individuals, businesses and government entities through its branch network. The Bank’s primary deposit products are demand deposits, savings and time certificates of deposit, and its primary lending products are consumer, commercial and real estate loans.

Summary of Operating Results

The following table provides comparative information with respect to our results of operations (unaudited) for the three and nine months periods ended September 30, 2011 and 2010, respectively;

 

(dollars in thousands)    Three months ended September 30,     Nine months ended September 30,  

(unaudited)

   2011
amount
     2010
amount
     % change     2011
amount
     2010
amount
     % change  

Interest income

   $ 12,601       $ 12,852         (2.0 )%    $ 38,034       $ 36,858         3.2

Interest expense

     1,441         1,411         2.1     4,218         4,626         (8.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

     11,160         11,441         (2.5 )%      33,816         32,232         4.9

Provision for loan losses

     1,275         750         70.0     3,225         2,225         44.9
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     9,885         10,691         (7.5 )%      30,591         30,007         1.9

Total non-interest income

     2,993         3,211         (6.8 )%      9,081         8,895         2.1

Total non-interest Expense

     11,285         10,443         8.1     33,649         32,054         5.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income before income taxes

     1,593         3,459         (53.9 )%      6,023         6,848         (12.0 )% 

Provision for income taxes

     318         865         (63.2 )%      1,272         1,731         (26.5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income

   $ 1,275       $ 2,594         (50.8 )%    $ 4,751       $ 5,117         (7.2 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income per common share

                

Basic

   $ 0.15       $ 0.30         $ 0.54       $ 0.59      

Diluted

   $ 0.15       $ 0.29         $ 0.54       $ 0.58      

 

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As the above table indicates, our net income decreased in the three and nine months ended September 30, 2011, as compared to the corresponding periods in 2010. In the three months ended September 30, 2011, we recorded net income after taxes of $1.3 million, down $1.3 million (or 50.8%) as compared to the same period in 2010. Likewise, in the nine months ended September 2011, we recorded net income after taxes of $4.8 million, down $0.4 million (or 7.2%) as compared to the same period in 2010. These results were most significantly impacted by; (i) much higher loan loss provision, which increased by $0.5 million and $1.0 million, respectively, and; (ii) higher total non-interest expenses, which increased by $0.8 million and $1.6 million, respectively. The increase in the provision was a result of management’s decision to increase the allowance for loan losses due to the increase in gross loan charge-offs. These increases in non-interest expenses in the three and nine months ended September 30, 2011 as compared to the same period in 2010 were largely attributed to the increase in employee salaries and related benefit expenses, which increased by $0.7 million and $1.6 million, respectively.

The following table indicates the impact that the decrease in our operating results in the three and nine months ended September 30, 2011 had on our annualized returns on average assets and average equity during those periods, as compared to the three and nine months of 2010:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2011     2010     2011     2010  

Return on average assets %

     0.48     1.06     0.61     0.71

Return on average equity %

     5.79     12.29     7.34     8.24

Critical Accounting Policies

The Company’s significant accounting policies are set forth in Note 1 in the Notes to the Bank’s Annual Report on Form 10-K for 2010 filed with the Federal Deposit Insurance Corporation on March 14, 2011. In addition to this filing, on August 15, 2011, the Bank filed with the Securities Exchange Commission Form 8-K12G3, in which Form 10-K was included as an exhibit. Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and general practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make assumptions and judgments regarding circumstances or trends that could affect the carrying values of our material assets, such as assumptions regarding economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying values of certain of our other assets, such as securities available for sale. If adverse changes were to occur in the events, trends or other circumstances on which our assumptions or judgments had been based, or other unanticipated events were to happen that might affect our operating results, under GAAP it could become necessary for us to reduce the carrying values of the affected assets on our Statement of Condition. In addition, because reductions in the carrying values of assets are sometime effectuated by or require charges to income, such reductions also may have the effect of reducing our income. The following is a brief description of the Company’s current accounting policies involving significant valuation judgments.

 

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Loans and Interest on Loans

Loan receivables that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances, reduced by any charge-off of specific valuation allowances and net of any deferred fees or cost on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination cost are capitalized and recognized as an adjustment in yield over the life of the related loan.

Loans on which the accrual of interest has been discontinued are designated as non-accruing loans. The accrual of interest on loans is discontinued when principal and/or interest is past due 90 days or more based on contractual terms of the loan and/or when, in the opinion of management, there is reasonable doubt as to collectability unless such loans are well collateralized and in the process of collection. When loans are placed in non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest payments received on such loans are generally applied as a reduction to the loan principal balance, unless the likelihood of further loss is remote whereby cash interest payments may be recorded during the time the loan is on non-accrual status. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, all remaining principal and interest is estimated to be fully collectible, there has been at least six months of sustained repayment performance since the loan was placed on non-accrual and/or management believes, based on current information, that such loan is no longer impaired.

Management considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all the amounts due according to the contractual terms of the loan agreement. Measurement of impairment is based on the expected future cash flows of an impaired loan which are discounted at the loan’s original effective interest rate, or measured by reference to an observable market value, if one exist, or the fair value of the collateral for a collateral-dependent loan. All loans are generally charge-off at such time that it is highly certain a loss has been realized.

Allowance for Loan Losses

The Company maintains its allowance for loan losses at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio as of the balance sheet date. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature and volume of the portfolio, credit concentrations, trends in historical loss experience, the level of certain classified and impaired loans, and economic conditions and the related impact on specific borrowers and industry groups. The allowance is increased by provisions for loan losses, which are charged to earnings and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management’s estimate of credit losses inherent in the loan portfolio and the related allowance may change.

Other Real Estate Owned

Real estate and other property acquired in full or partial settlement of loan obligations is referred to as other real estate owned (“OREO”). OREO is originally recorded in the Company’s unaudited condensed financial statements at fair value less any estimated cost to sell. When property is acquired through foreclosure or surrendered in lieu of foreclosure, the Company measures the fair value of the property acquired against its recorded investment in the loan. If the fair value of the property at the time of acquisition is less than the recorded investment in the loan, the difference is charged to the allowance for loan losses. Any subsequent fluctuations in fair value of the OREO are recorded against a valuation allowance for foreclosed assets,

 

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established through a charge to non-interest expense. All related operating or maintenance costs are charged to non-interest expense as incurred. Any subsequent gains or losses on the sale of OREO are recorded in other income or expense as incurred.

Investment Securities

In accordance with U.S. GAAP, securities are classified in three categories and accounted for as follows: (i) securities that the Company has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and are measured at amortized cost; (ii) securities bought and held principally for the purpose of selling in the near term are classified as “trading” securities and are measured at fair value, with unrealized gains and losses included in earnings, and; (iii) securities not classified as either held-to- maturity or trading are classified as “available-for-sale” securities and are measured at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of stockholders’ equity. Where available, the fair values of available-for-sale securities are based on quoted market prices. If quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments or through the use of other observable data supporting a valuation model. Gains and losses on sales of investment securities are determined on the specific identification method. Premiums and discounts are amortized or accreted using the interest method over the expected lives of the related securities.

 

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Results of Operations

Net Interest Income

Net interest income, the primary component of a financial institution’s income, refers to the difference between the interest earned on loans, investment securities and other interest-earning assets, and the interest paid on deposits, and interest paid on other borrowed funds. Our interest income and interest expense are affected by a number of factors, some of which are outside of our control, including national and local economic conditions and the monetary policies of the Federal Reserve Board which affect interest rates, competition in the market place for loans and deposits, the demand for loans and the ability of borrowers to meet their payment obligations. Net interest income, when expressed as a percentage of average earning assets, is a banking organization’s “net interest margin”.

The following table sets forth our interest income, interest expense and net interest income (in thousands of dollars) and our annualized net interest margin for the three and nine months ended September 30, 2011 and 2010, respectively:

 

     Three months ended September 30,     Nine months ended September 30,  
      2011
Amount
    2010
Amount
    %
Change
    2011
Amount
    2010
Amount
    %
Change
 

Interest income

   $ 12,601      $ 12,852        (2.0 )%    $ 38,034      $ 36,858        3.2

Interest expense

     1,441        1,411        2.1     4,218        4,626        (8.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 11,160      $ 11,441        (2.5 )%    $ 33,816      $ 32,232        4.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     4.59     5.11     (0.52 )%      4.77     4.91     (0.14 )% 

Net interest income dropped by 2.5% for the three months ended September 30, 2011, but increased by 4.9% for the nine months ended September 30, 2011 as compared to the corresponding periods in 2010.

For the three months ended September 30, 2011, net interest income dropped by $0.3 million (down 2.5%) as compared to the same period in 2010 largely attributed to the $0.5 million decrease in interest earned on loans, which was partially offset by the $0.3 million increase in interest income from our investment securities portfolio. Interest expense, which is comprised of interest paid on deposits and other borrowed funds increased nominally by $30 thousand during the same period. Conversely, for the nine months ended September 30, 2011, our net interest income increased by $1.6 million (up 4.9%) as compared to the same period in 2010 attributed to the $1.2 million increase in interest income, coupled with the $0.4 million decrease in interest paid on deposits and other borrowings. The increase in interest income is primarily attributed to a $1.6 million increase in interest and fees earned on loans partially offset by the $0.2 million decrease in interest income from investment securities. Interest paid expense for the nine months ended September 30, 2011 dropped by $0.4 million as a result of the $0.3 million decrease in interest paid on time deposits and $0.1 million decrease in interest paid on other borrowed funds as compared to the same period in 2010.

As indicated in the above table, our net interest margin for the three and nine months ended September 30, 2011 decreased by 0.59% to 4.63%; and decreased by 0.19% to 4.68%, respectively, as compared to the corresponding three and nine months period in 2010.

 

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Average Balances

Information regarding Average Assets and Average Liabilities

The following tables sets forth information regarding our average balance sheet, yields on interest earning assets, interest expense on interest-bearing liabilities, the interest spread and the interest rate margin for the three and nine months ended September 30, 2011 and 2010:

 

            Three months ended September 30,                
(dollars in thousands)    2011
Average
balance
     2011
Interest
earned/paid
     2011
Average

yield/rate
    2010
Average

balance
     2010
Interest

earned/paid
     2010
Average

yield/rate
 

Interest earning assets:

                

Short term investments¹

   $ 74,299       $ 95         0.51   $ 70,013       $ 121         0.69

Investment securities

     290,905         1,532         2.11     211,285         1,211         2.29

Loans²

     608,143         10,973         7.22     614,041         11,521         7.51
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest earning assets

     973,347         12,600         5.18     895,339         12,853         5.74

Non-interest earning assets

     91,068              88,105         
  

 

 

         

 

 

       

Total Assets

   $ 1,064,415            $ 983,444         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Interest-bearing checking accounts

   $ 85,601         52         0.24   $ 74,287         45         0.24

Money market and savings accounts

     550,832         1,219         0.89     491,511         1,090         0.89

Certificates of deposit

     70,276         69         0.39     90,150         137         0.61

Other borrowings

     10,000         100         4.00     15,000         140         3.73
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     716,709         1,440         0.80     670,948         1,412         0.84
     

 

 

         

 

 

    

Non-interest-bearing liabilities

     259,603              228,088         
  

 

 

         

 

 

       

Total liabilities

     976,312              899,036         

Shareholders’ equity

     88,103              84,408         
  

 

 

         

 

 

       

Total Liabilities and Shareholders’ equity

   $ 1,064,415            $ 983,444         
  

 

 

         

 

 

       

Net interest income

      $ 11,160            $ 11,441      
     

 

 

         

 

 

    

Interest rate spread

           4.38           4.90
        

 

 

         

 

 

 

Net interest margin

           4.59           5.11
        

 

 

         

 

 

 

 

(¹) Short term investments consist of federal funds sold and interest-bearing deposits that we maintain with other financial institutions.
(²) Loans include the average balance of non-accrual loans.

For the three months ended September 30, 2011 our total average earning assets increased by $78.0 million as compared to the same period in 2010, largely attributed to the $79.6 million increase in our investment securities portfolio and the $4.3 million increase in short term investments. The overall growth in the investment securities and short term investment portfolios were derived from sustained growth in our deposit base. In the same three months period ended September 30, 2011, total interest-bearing liabilities increased by $45.8 million largely attributed to the $59.3 million increase in money market and savings deposits, coupled with the $11.3 million increase in interest-bearing checking account balances. These were, however, partially offset by the $19.9 million decrease in certificates of deposit and $5.0 million decrease in other borrowings as compared to the same period in 2010.

 

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Our net interest spread and net interest margin in the three months ended September 30, 2011 declined by 0.53% and 0.52%, respectively, as compared to the same period in 2010 primarily attributed to the 0.18% decline in our short term investment yields and 0.29% decline in our loan yields.

 

            Nine months ended September 30,                
(dollars in thousands)    2011
Average
balance
     2011
Interest
earned/paid
     2011
Average
yield/rate
    2010
Average
balance
     2010
Interest

earned/paid
     2010
Average

yield/rate
 

Interest earning assets:

                

Short term investments¹

   $ 71,650       $ 309         0.58   $ 62,006       $ 472         1.01

Investment securities

     260,470         4,244         2.17     229,323         4,452         2.59

Loans²

     612,663         33,481         7.29     584,205         31,935         7.29
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest earning assets

     944,783         38,034         5.37     875,534         36,859         5.61

Non-interest earning assets

     90,676              91,380         
  

 

 

         

 

 

       

Total Assets

   $ 1,035,459            $ 966,914         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Interest-bearing checking accounts

   $ 80,068         149         0.25   $ 72,587         129         0.24

Money market and savings accounts

     531,647         3,511         0.88     466,292         3,575         1.02

Certificates of deposit

     75,326         228         0.40     94,140         488         0.69

Other borrowings

     11,250         330         3.91     20,000         435         2.90
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing

     698,291         4,218         0.81     653,019         4,627         0.94
     

 

 

         

 

 

    

liabilities

                

Non-interest-bearing liabilities

     250,901              231,074         
  

 

 

         

 

 

       

Total liabilities

     949,192              884,093         

Shareholders’ equity

     86,267              82,821         
  

 

 

         

 

 

       

Total Liabilities and Shareholders’ equity

   $ 1,035,459            $ 966,914         
  

 

 

         

 

 

       

Net interest income

      $ 33,816            $ 32,232      
     

 

 

         

 

 

    

Interest rate spread

           4.56           4.67
        

 

 

         

 

 

 

Net interest margin

           4.77           4.91
        

 

 

         

 

 

 

 

(¹) Short term investments consist of federal funds sold and interest-bearing deposits that we maintain with other financial institutions.
(²) Loans include the average balance of non-accrual loans.

In the nine months ended September 30, 2011 our total average earning assets increased by $69.2 million as compared to the same period in 2010 attributed to the $31.1 million increase in our investment securities portfolio, $28.5 million increase in total loans, and $9.6 million increase in short term investments. Likewise, in the same nine months period, our total interest-bearing liabilities increased by $45.3 million largely attributed to the $65.4 million increase in money market and savings deposits, coupled with the $7.5 million increase in interest-bearing checking account balances. These were, however, partially offset by the $18.8 million decrease in certificates of deposit and $8.75 million decrease in other borrowings.

Our net interest spread and net interest margin in the nine months period ended September 30, 2011 declined by 0.11% and 0.14%, respectively, as compared to the same period in 2010. The decline in net interest spread and net interest margin is attributed to the overall decline in the average yield on earning assets, down by 0.24% which was partially offset by the 0.13% decline in the average interest rate on interest-bearing liabilities.

 

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Table of Contents

Provision for Loan Losses

We maintain reserves to provide for possible loan losses that occur from time to time as an incidental part of the banking business. As more fully discussed in Note 4 of the notes to the unaudited condensed consolidated financial statements in this Quarterly Report Form 10-Q, an allowance for loan losses has been established by management in order to provide for those loans, which for a variety of reasons, may not be repaid in their entirety. The allowance is maintained at a level considered by management to be adequate to provide for probable losses during the holding period of the loan and is based on methodologies applied on a consistent basis with the prior year. Management’s review of the adequacy of the allowance includes, among other things, an analysis of past loan loss experience and management’s evaluation of the loan portfolio under current economic conditions.

The allowance for loan losses is based on estimates, and ultimate losses will vary from current estimates. The Company recognizes that credit losses will be experienced and the risk of loss will vary with, among other things: general economic conditions; the type of loan being made; the credit worthiness of the borrower over the term of the loan and in the case of a collateralized loan, the quality of the collateral of such loan. The allowance for loan losses represents the Company’s best estimate of the allowance necessary to provide for probable losses in the portfolio as of the balance sheet date.

For the three and nine months ended September 30, 2011, the Company’s provision for loan losses was $1.3 million and $3.2 million, respectively. This represents an increase of $0.5 million and $1.0 million in provisions recorded as compared to the corresponding three and nine month period in 2010, respectively. Management believes that the increase in the provision for loan losses was necessary to provide for the incremental risk of loss inherent with increase in average loan portfolio by $28.5 million from $584.2 million for the nine months ended September 30, 2010 to $612.7 million for the nine months ended September 30, 2011. By comparison, we recorded net loan charge-offs of $0.8 million and $2.4 million for the three and nine month period ended September 30, 2011, respectively, and the allowance for loan losses at September 30, 2011 stood at $10.2 million or 1.64% of total gross loans outstanding as of the balance sheet date. See “Analysis of Allowance for Loan Losses” in the Financial Condition Section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Non-Interest Income

The tables below represent the major components of non-interest income and the changes for the three and nine months ended September 30, 2011 as compared to the same periods in 2010.

 

             Three months ended September 30,        

(dollars in thousands)

   2011
amount
     2010
amount
     Amount
change
    Percent
change
 

Fees and service charges

   $ 669       $ 610       $ 59        9.67

Insurance commissions and fees

     148         133         15        11.28

Trust and wealth management fees

     166         233         (67     (28.76 )% 

Loan servicing fees

     178         164         14        8.54

Gain on sale of securities

     554         1,061         (507     (47.79 )% 

Other commission and fees

     1,278         1,010         268        26.53
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 2,993       $ 3,211       $ (218     (6.79 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
             Nine months ended September 30,        

(dollars in thousands)

   2011
amount
     2010
amount
     Amount
change
    Percent
change
 

Fees and service charges

   $ 1,964       $ 1,921       $ 43        2.24

Insurance commissions and fees

     487         538         (51     (9.48 )% 

Trust and wealth management fees

     501         482         19        3.94

Loan servicing fees

     576         405         171        42.22

Gain on sale of securities

     1,725         1,854         (129     (6.96 )% 

Other commission and fees

     3,828         3,695         133        3.60
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 9,081       $ 8,895       $ 186        2.09
  

 

 

    

 

 

    

 

 

   

 

 

 

For the three and nine months ended September 30, 2011 non-interest income totaled $3.0 million and $9.1 million, respectively, which represented a decline of $0.2 million in the three months period, but increased by $0.2 million in the nine months period in 2011 as compared to the same periods in 2010.

For the three months period ended September 30, 2011, the $0.2 million decline in total non-interest income is largely attributed to the $0.5 million decrease in gain on sale of investment securities, coupled with the $67 thousand decrease in our trust and wealth management service fees. These were offset partially by the $0.3 million increase in other commissions and fees and the $59 thousand increase service charges and fees.

Conversely, for the nine months period ended September 30, 2011, the $0.2 million increase in total non-interest income is largely attributed to the $0.2 million increase in loans servicing fees (comprised of our share of loan origination fees on Freddie Mac loans), coupled with the combined increase of $0.2 million in our service charges and fees and other commission and fees, as compared to the same period in 2010.

Non-interest Expense

The tables below represent the major components of non-interest expense and the changes for the three and nine months ended September 30, 2011 as compared to the same periods in 2010.

 

             Three months ended September 30,        

(dollars in thousands)

   2011
amount
     2010
amount
     Amount
change
    Percent
change
 

Salaries and employee benefits

   $ 5,571       $ 4,919       $ 652        13.25

Occupancy

     1,610         1,459         151        10.35

Furniture and equipment

     582         639         (57     (8.92 )% 

Computer equipment maintenance

     569         466         103        22.10

FDIC insurance expense

     230         346         (116     (33.53 )% 

Other real estate owned expense

     18         69         (51     (73.91 )% 

Professional fees

     165         225         (60     (26.67 )% 

Other general operating expense

     2,540         2,320         220        9.48
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest expense

   $ 11,285       $ 10,443       $ 842        8.06
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
             Nine months ended September 30,        

(dollars in thousands)

   2011
amount
     2010
amount
     Amount
change
    Percent
change
 

Salaries and employee benefits

   $ 16,269       $ 14,662       $ 1,607        10.96

Occupancy

     4,488         4,239         249        5.87

Furniture and equipment

     1,810         1,990         (180     (9.05 )% 

Computer equipment maintenance

     1,780         1,880         (100     (5.32 )% 

FDIC insurance expense

     971         1,083         (112     (10.34 )% 

Other real estate owned expense

     150         171         (21     (12.28 )% 

Professional fees

     489         788         (299     (37.94 )% 

Other general operating expense

     7,692         7,241         451        6.23
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest expense

   $ 33,649       $ 32,054       $ 1,595        4.98
  

 

 

    

 

 

    

 

 

   

 

 

 

For the three and nine months ended September 30, 2011 non-interest expense totaled $11.3 million and $33.6 million, respectively, which represented a $0.8 million increase in the three months period and $1.6 million increase in the nine months period in 2011 as compared to the same periods in 2010.

For the three months period ended September 30, 2011, the $0.8 million increase in total non-interest expense is largely attributed to the $0.7 million increase in salaries and employee benefits expense, the $0.2 million increase in occupancy expense, the $0.1 million increase in computer equipment maintenance, and the $0.2 million increase in other general operating expenses. These were, however, partially offset by the $0.1 million decrease in FDIC insurance expense, the $60 thousand decrease in professional fees, and the $51 thousand decrease in other real estate owned expense, as compared to the same period in 2010.

Likewise, for the nine months ended September 30, 2011, the $1.6 million increase in total non-interest expense was largely attributed to the $1.6 million increase in salaries and employee benefits expense, the $0.5 million increase in other general operating expenses and the $0.2 million increase in occupancy expense. These, however, were partially offset by the $0.3 million decrease in professional fees, the $0.2 million decrease in furniture and equipment expense, the $0.1 million decrease in FDIC insurance expense and the $0.1 million decrease in computer equipment maintenance expense.

As mentioned above, the most significant increase in our non-interest expenses are in salaries and employee benefits expense which was largely attributed to the incremental cost in converting our part-time employees to prime-time status. This change in employment status provided the employees with medical and other related benefits which greatly improved employee retention, especially at our branches.

Provision for Income Taxes

For the three and nine months ended September 30, 2011, the Company recorded income tax expenses of $0.3 million and $1.3 million, respectively. This compares to the $0.9 million and $1.7 million in income tax expenses recorded for the corresponding periods in 2010. The decrease in income tax expenses recorded the three and nine months ended September 30, 2011 is the result of the Company’s lower overall pre-tax profits as compared to the same periods in 2010.

Financial Condition

Assets

At September 30, 2011 our consolidated total assets increased to $1.1 billion, up $112.6 million from $990.6 million at December 31, 2010. This increase is largely attributed to the $113.3 million increase in our interest earning assets portfolio, lead by the $90.6 million combined increase in our investment securities portfolio followed by the $23.4 million increase in interest-bearing deposits that we maintained at other financial institutions, which includes interest-earning balances we maintained at the Federal Reserve Bank of San Francisco.

 

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Interest-Earning Assets

The following table sets forth the composition of our interest-earning assets at September 30, 2011 as compared to December 31, 2010:

 

(dollars in thousands)    September 30,
2011
     December 31,
2010
     Variance
2011 vs. 2010
 

Interest-earning deposits with financial institutions

   $ 83,959       $ 60,526       $ 23,433   

Federal Home Loan Bank stock, at cost

     2,198         2,198         —     

Investment securities available for sale

     259,744         191,312         68,432   

Investment securities held to maturity

     50,527         28,366         22,161   

Loans (net of allowances of $10,208 and $9,408)

     610,396         611,139         (743
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets

   $ 1,006,824       $ 893,541       $ 113,283   
  

 

 

    

 

 

    

 

 

 

Loans

The following table sets forth the composition, by loan category, of our loan portfolio at September 30, 2011 and December 31, 2010, respectively:

Commercial loans are loans to businesses to finance capital purchase, improvements, or to provide cash flow for operations. Commercial loans real estate secured includes loans secured by commercial real property to for purposes such as the purchase or improve the real property, wherein repayment of such loan is derived from the income generated by the real property. Consumer real estate are loans to finance the purchase, improvement, or refinance of real property secured by 1 -4 family units. Consumer loans are loans to individuals to finance personal needs and are either closed-ended or open-ended loans. The bulk of the Consumer loans are typically unsecured extensions of credit.

 

     September 30, 2011     December 31, 2010  
(dollars in thousands)    Amount      Percent     Amount      Percent  

Commercial Loans

   $ 158,654         26   $ 163,517         26

Commercial Loan Real Estate Secured

     261,239         42     253,022         41
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Commercial

     419,893         68     416,539         67

Consumer Real Estate Loan (secured 1-4 family)

     85,625         14     89,112         14

Consumer Loans

     116,475         18     116,302         19
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Consumer

     202,100         32     205,414         33
  

 

 

      

 

 

    

Gross loans

   $ 621,993         100   $ 621,953         100
  

 

 

      

 

 

    

Unearned Discount

     174           208      

Allowance for Loan Losses

   $ 10,208         $ 9,408      

At September 30, 2011 total gross loans increased by $40 thousand to $621.99 million, up from $621.95 million at December 31, 2010. The growth in loans were largely attributed to (i) $3.4 million increase in commercial loans to $419.9 million at September 30, 2011 from $416.5 million at December 31, 2010, partially offset by the $0.2 million decrease in consumer loans, which dropped to $116.5 million down

 

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from $116.3 million, and the $3.5 million decrease in consumer real estate loans (secured by 1-4 family units) which dropped to $85.6 million at September 30, 2011, down from $89.1 million at December 31, 2010. The decline in the consumer real estate portfolio was mostly the result of sales of such loans to the secondary market (Freddie Mac or FHLMC).

Non-Performing Loans and other Non-Performing Assets

Non-performing loans consist of (i) loans on non-accrual status because we have ceased accruing interest on these loans and (ii) loans 90 days or more past due and still accruing interest. Non-performing assets consist of real estate properties (OREO) that have been acquired through foreclosure or similar means and which management intends to offer for sale. Loans are placed on non-accrual status when in the opinion of management, the full and timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payment becomes 90 days past due, unless the loan is adequately collateralized and the loan is in the process of collection. When a loan is placed in non-accrual status, accrued but unpaid interest is reversed against current income. Subsequently, when payments are received on such loans, the amounts are applied to reduce principal, except when the ultimate collectability of principal is probable, in which case accrued loans may be restored to accrual status when principal and interest becomes current and full repayment is expected. Interest income is recognized on an accrual basis for impaired loans not meeting the non-accrual criteria.

The following table contains information regarding our non-performing assets, as well as restructured loans as September 30, 2011 and December 31, 2010.

 

(dollars in thousands)    September 30,
2011
     December 31,
2010
 

Non-accrual loans:

     

Commercial loans

   $ 64       $ 381   

Commercial real estate

     8,602         8,190   

Residential real estate

     2,839         3,662   

Construction and land development

     2,478         2,982   

Consumer loans

     102         95   
  

 

 

    

 

 

 

Total nonaccrual loans:

   $ 14,085       $ 15,310   
  

 

 

    

 

 

 

Loans past due 90 days and still accruing:

     

Commercial loans

   $ 194       $ —     

Commercial real estate

     —           —     

Residential real estate

     647         —     

Consumer loans

     1,186         1,548   
  

 

 

    

 

 

 

Total loans past due 90 days and still accruing

   $ 2,027       $ 1,548   
  

 

 

    

 

 

 

Total non-performing loans

   $ 16,112       $ 16,858   

Other real estate owned (OREO):

     

Commercial loans

     —           —     

Commercial real estate

   $ 3,720       $ 4,367   

Residential real estate

     489         46   

Construction and land development

     —           —     
  

 

 

    

 

 

 

Total other real estate owned

   $ 4,209       $ 4,413   
  

 

 

    

 

 

 

Other non-performing assets:

     

Other assets owned

   $ —         $ —     

Asset backed security

     —           —     

Total other nonperforming assets

     —           —     
  

 

 

    

 

 

 

Total nonperforming assets

   $ 20,321       $ 21,271   
  

 

 

    

 

 

 

Restructured loans:

     

Accruing loans

   $ 3,309       $ 3,053   

Non-accruing loans (included in nonaccrual loans above)

     6,379         6,780   
  

 

 

    

 

 

 

Total restructured loans

   $ 9,688       $ 9,833   
  

 

 

    

 

 

 

 

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Table of Contents

The above table indicates non-performing loans decreased by $0.7 million or 4.43% as a result of the decrease in non-accrual loans, primarily in residential real estate and construction and land development loans. Additionally, other real estate owned declined by $0.2 million or 4.62%.

At September 30, 2011, the Company’s largest non-performing loans consist of three relationships in the amount of $8.3 million, two of which are located in Guam totaling $5.8 million and both loans are secured by commercial properties. The loans were placed on non-accrual due to deficiencies in their cash flow to service the monthly loan payments and meet operating expenses, although the payments are made on a regular basis. The other relationship in the amount of $2.5 million is a participation loan purchased from a California based bank to a builder/developer of a condominium project in Vallejo, California. The loan was placed in non-accrual due to the slow rate at which the units are selling. At this time, management believes that these loans are adequately reserved, however, should property values deteriorate further, additional write down or additional provisions may be necessary.

Analysis of Allowance for Loan Losses

The Allowance for Loans Losses was $10.2 million and 1.64% of outstanding loans as of September 30, 2011 as compared to $9.4 million or 1.51% of outstanding loans at December 31, 2010.

Management maintains an allowance for loan losses (allowance) to absorb estimated credit losses associated with the loan portfolio. The adequacy of the allowance is determined by management through ongoing quarterly loan quality assessment.

Management assesses the estimated credit losses inherited in our non-classified and classified loan portfolio by considering a number of factors or elements including:

 

   

Historical loss experience in the loan portfolio;

 

   

Levels of and trending in delinquency, classified assets, non –performing and impaired loans;

 

   

Effects of changes in underwriting standards and other changes in lending policies, procedures and practices;

 

   

Experience, ability, and depth of lending management and other relevant staff;

 

   

Local, regional, and national trends and conditions including industry specific conditions;

 

   

Effect of changes in credit concentration and;

 

   

External factors such as competition, legal and regulatory including typhoon and other natural disasters.

 

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Table of Contents

Management calculates the allowance for non-classified, classified loan portfolio and homogenous pool of loans based on an appropriate percentage loss factor that is calculated based on the above noted factors and trends. Management normally writes down impaired loans after determining the loan’s credit and collateral fair value. Our analysis of the adequacy of the allowance incorporates the provisions made for our non-classified loans, classified loans, and homogenous pool of loans.

While management believes it uses the best information available for the allowance, the results of operation could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. The current qualitative and quantitative factors used to calculate the allowance are inherently subjective. The estimates and assumptions are subject to changes in economic and in regulatory guidelines or other circumstances over which management has no control. The allowance may prove in the future to be insufficient to cover all of the losses the Bank may incur and it may be necessary to increase the allowance from time to time as a result of monitoring the adequacy of the allowance for loan losses.

The following table summarizes the changes in our allowance for loan losses.

 

(dollars in thousands)    Commercial     Consumer     Total  

Three months ended September 30, 2011

      

Allowance for Loan and Lease Losses:

      

Balance at Beginning of Period 1

       $ 9,739   

Loans and Leases Charged-Off

     (142     (958     (1,100

Recoveries on Loans and Leases Previously Charged-Off

     8        286        294   

Net Loans and Leases Charged-Off

     (134     (672     (806

Provision for Credit Losses 1

         1,275   
      

 

 

 

Balance at End of Period 1

       $ 10,208   

Nine months ended September 30, 2011

      

Allowance for Loan and Lease Losses:

      

Balance at Beginning of Period 1

       $ 9,408   

Loans and Leases Charged-Off

     (398     (3,059     (3,457

Recoveries on Loans and Leases Previously Charged-Off

     35        997        1,032   

Net Loans and Leases Charged-Off

     (363     (2,062     (2,425

Provision for Credit Losses 1

         3,225   
      

 

 

 

Balance at End of Period 1

       $ 10,208   

As of September 30, 2011

      

Allowance for Loan and Lease Losses:

      

Individually Evaluated for Impairment 1

       $ 0   

Collectively Evaluated for Impairment 1

         10,208   
      

 

 

 

Total

       $ 10,208   

Recorded Investment in Loans and Leases:

      

Individually Evaluated for Impairment

   $ 14,453      $ 2,941      $ 17,394   

Collectively Evaluated for Impairment

     405,440        199,159        604,599   
  

 

 

   

 

 

   

 

 

 

Total

   $ 419,893      $ 202,100      $ 621,993   

 

1 

It is not currently feasible for the Bank to split these balances between commercial and consumer loans.

Total Cash and Cash Equivalents

Total cash and cash equivalents were $122.5 million and $101.5 million at September 30, 2011 and December 31, 2011, respectively. This balance, which is comprised of cash and due from bank balances, federal funds sold and interest-bearing deposits that we maintain at other financial institutions (including the Federal Reserve Bank of San Francisco) will vary depending on daily cash settlement activities, the amount of highly liquid assets needed based on known events such as the repayment of borrowings, and actual cash on hand in the branches.

 

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Table of Contents

The following table sets forth the composition of our cash and cash equivalent balances at September 31, 2011 and December 31, 2010:

 

(dollars in thousands)    September 30,
2011
     December 31,
2010
     Variance
2011 vs. 2010
 

Cash and due from banks

   $ 33,701       $ 32,102       $ 1,599   

Federal funds sold

     5,000         10,000         (5,000

Interest-bearing deposits with financial institutions

     83,809         59,376         24,433   
  

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

   $ 122,510       $ 101,478       $ 21,032   
  

 

 

    

 

 

    

 

 

 

Investment Securities

The Company manages its securities portfolio to provide a source of both liquidity and earnings. The Company has an Asset/Liability Committee (ALCO) that develops current investment policies based on its operating needs and market circumstances. The Company’s investment policy is formally reviewed and approved annually by the Board of Directors, and the Asset/Liability Committee is responsible for reporting and monitoring compliance with the investment policy. Investment portfolio reports are provided to the Board of Directors on a monthly basis.

At September 30, 2011, the balance of the investment securities portfolio totaled $310.3 million which represents a $90.6 million increase from the portfolio balance of $219.7 million at December 31, 2010. The following table sets forth the composition of our investment securities portfolio at September 30, 2011 and December 31, 2010:

The amortized cost and fair value of investment securities, with gross unrealized gains and losses, follows:

 

            September 30, 2011        

Securities Available for Sale

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. government agency and sponsored Agencies (GSE) debt securities

   $ 76,925       $ 800       $ (1   $ 77,724   

U.S. government agency pool securities

     9,544         79         (1     9,622   

U.S. government agency or GSE mortgage-backed securities

     170,836         1,809         (247     172,398   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 257,305       $ 2,688       $ (249   $ 259,744   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. government agency pool securities

   $ 2,243       $ 11       $ (18   $ 2,236   

U.S. government agency or GSE mortgage-backed securities

     48,284         1,714         0        49,998   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Held to Maturity

   $ 50,527       $ 1,725       $ (18   $ 52,234   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
            December 31, 2010        

Securities Available for Sale

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. government agency and sponsored Agencies (GSE) debt securities

   $ 85,004       $ 131       $ (636   $ 84,499   

U.S. government agency pool securities

     43,732         531         (67     44,196   

U.S. government agency or GSE mortgage-backed securities

     63,822         106         (1,311     62,617   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Available for Sale

   $ 192,558       $ 768       $ (2,014   $ 191,312   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

                          

U.S. government agency pool securities

   $ 2,784       $ 28       $ (24   $ 2,788   

U.S. government agency or GSE mortgage-backed securities

     25,582         1,489         0        27,071   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Held to Maturity

   $ 28,366       $ 1,517       $ (24   $ 29,859   
  

 

 

    

 

 

    

 

 

   

 

 

 

At September 30, 2011 and December 31, 2010, investment securities with a carrying value of $123.3 million and $124.1 million, respectively, were pledged to secure various Government deposits and other public requirements.

The amortized cost and fair value of investment securities by contractual maturity at September 30, 2011 and December 31, 2010, follows:

 

            September 30, 2011         
     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due after one but within five years

   $ 61,962       $ 62,582       $ 0       $ 0   

Due after five years

     14,963         15,143         0         0   

U.S. government agency pool securities

     9,544         9,622         2,243         2,236   

Mortgage-backed securities

     170,836         172,397         48,284         49,998   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 257,305       $ 259,744       $ 50,527       $ 52,234   
  

 

 

    

 

 

    

 

 

    

 

 

 
            December 31, 2010         
     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due after one but within five years

   $ 85,004       $ 84,499       $ 0       $ 0   

U.S. government agency pool securities

     43,732         44,196         2,784         2,788   

Mortgage-backed securities

     63,822         62,617         25,582         27,071   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 192,558       $ 191,312       $ 28,366       $ 29,859   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Temporarily Impaired Securities

The following table shows the gross unrealized losses and fair value of 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 loss position at September 30, 2011 and December 31, 2010.

 

            September 30, 2011         
     Less Than Twelve Months      Over Twelve Months  
     Unrealized Loss      Fair Value      Unrealized Loss      Fair Value  

Securities Available for Sale

           

U.S. government agency and sponsored Agencies (GSE) debt securities

   $ 1       $ 9,994       $ 0       $ 0   

U.S. government agency pool securities

     0         0         1         90   

U.S. government agency or GSE mortgage-backed securities

     247         36,175         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 248       $ 46,169       $ 1       $ 90   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity

           

U.S. government agency pool securities

   $ 0       $ 0       $ 18       $ 1,620   

U.S. government agency or GSE mortgage-backed securities

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Held to Maturity

   $ 0       $ 0       $ 18       $ 1,620   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            December 31, 2010         
     Less Than Twelve Months      Over Twelve Months  
     Unrealized Loss      Fair Value      Unrealized Loss      Fair Value  

Securities Available for Sale

           

U.S. government agency and sponsored Agencies (GSE) debt securities

   $ 636       $ 54,364       $ 0       $ 0   

U.S. government agency pool securities

     0         0         67         11,051   

U.S. government agency or GSE mortgage-backed securities

     1,311         55,363         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 1,947       $ 109,727       $ 67       $ 11,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity

           

U.S. government agency or GSE Mortgage-backed securities

   $ 1       $ 18       $ 23       $ 1,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Bank does not believe that the investment securities that were in an unrealized loss position as of September 30, 2011, which comprised a total of 17 securities, were other-than-temporarily impaired. Specifically, the 17 securities are comprised of the following: 8 Small Business Administration (SBA) Pool securities, 2 debt securities issued by Federal National Mortgage Association (FNMA), 3 mortgage-backed security issued by FNMA, 1 mortgage-backed securities issued by Government National Mortgage Association and 3 mortgage-backed security issued by Federal Home Loan Mortgage Corporation (FHLMC).

 

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Table of Contents

Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Bank does not intend to sell the investment securities that were in an unrealized loss position and it is not likely that the Bank will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

Deposits

At September 30, 2011, total deposits increased by $111.9 million to $1.0 billion as compared to $889.3 million in total deposits at December 31, 2010. This increase was largely concentrated in interest-bearing deposits (primarily in savings deposits) which increased by $90.0 million to $746.3 million at September 30, 2011, up from $656.3 million at December 31, 2010. In addition, non-interest bearing deposits increased by $21.9 million to $254.9 million at September 30, 2011, up from $233.0 million at December 31, 2010.

The following table sets forth the composition of our interest-bearing deposit portfolio with the average balances and average interest rate at September 30, 2011 and September 30, 2010, respectively:

 

     September 30, 2011     September 30, 2010  
(dollars in thousands)    Average
balance
     Average
rate
    Average
balance
     Average
rate
 

Interest-bearing deposits:

          

Interest-bearing checking accounts

   $ 80,068         0.25   $ 72,587         0.24

Money market and savings accounts

     531,647         0.88     466,292         1.02

Certificates of deposit

     75,326         0.40     94,140         0.69
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing deposits

   $ 687,041         0.75   $ 633,019         0.88
  

 

 

    

 

 

   

 

 

    

 

 

 

Borrowed Funds

The Company has a variety of sources from which it may obtain secondary funding. These sources include, among others, the Federal Reserve Bank of San Francisco, the Federal Home Loan Bank-Seattle, and credit lines established with our correspondent banks. Borrowings are obtained for a variety of reasons which include, but not limited to, funding loan growth, the purchase of investments in the absence of core deposits, and to provide additional liquidity to meet demands of depositors.

At September 30, 2011, the Company had $10.0 million in borrowings outstanding with the Federal Home Loan Bank-Seattle, down $5.0 million from $15.0 million outstanding at December 31, 2010. The $5.0 million decrease was a result of the Company paying off a $5.0 million borrowing that matured during the second quarter of 2011.

Liquidity

We actively manage our liquidity needs to ensure that sufficient funds are available to meet our needs for cash, including to fund new loans and deposit withdrawals by our customers. We project the future sources and uses of funds and maintain liquid funds for unanticipated events. Our primary source of cash include cash we have in deposit at other financial institutions, repayment on loans, proceed from sale or maturity of investment securities, and increase in deposits. The primary uses of cash include funding new

 

45


Table of Contents

loans and making advances on existing lines of credit, purchasing investments, funding new residential mortgage loans, funding deposit withdrawals, and paying operating expenses. We maintain funds in overnight federal funds and other short-term investments to provide for short-term liquidity needs. We also have established, for contingency funding purposes, credit lines with the Federal Reserve Bank of San Francisco, the Federal Home Loan Bank-Seattle, and other correspondent banks in the U.S.

At September 30, 2011, our liquid assets, which include cash and due from banks, federal funds sold, interest-earning deposits with financial institutions, and investment securities available for sale totaled $382.4 million, up $88.5 million from $293.9 million at December 31, 2010.

Contractual Obligations

The Bank utilizes facilities, equipment and land under various operating leases with terms ranging from 1 to 99 years. Some of these leases include scheduled rent increases. The total amount of the rent is being debited to expense on the straight-line method over the lease terms in accordance with ASC Topic 840 “Leases.” The Bank has recorded a deferred obligation of $0.6million and $0.6 million as of September 30, 2011 and December 31, 2010, respectively, which has been included within other liabilities, to reflect the excess of rent expense over cash paid on the leases.

At September 30, 2011, annual lease commitments under the above non-cancelable operating leases were as follows:

 

Period ending September 30,

      

2011

   $ 1,609   

2012

     1,190   

2013

     1,051   

2014

     892   

2015

     599   

Thereafter

     19,925   
  

 

 

 
   $ 25,266   
  

 

 

 

The Bank leases certain facilities from two separate entities in which two of its directors have separate ownership interests. Lease payments made to these entities during the periods ended September 30, 2011 and December 31, 2010 approximated $0.2 million and $0.3 million, 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 September 30, 2011, minimum future rents to be received under non-cancelable operating sublease agreements were $56 thousand for the period ended September 30, 2012.

A summary of rental activities for periods ended September 30, 2011 and 2010, is as follows:

 

      September 30,
2011
     September 30,
2010
 

Rent expense

   $ 1,717       $ 1,747   

Less: sublease rentals

     191         204   
  

 

 

    

 

 

 
   $ 1,526       $ 1,543   
  

 

 

    

 

 

 

 

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Off Balance Sheet Arrangements

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 instruments include commitments to extend credit, standby 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.

The Bank’s exposure to credit loss, in the event of nonperformance 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 September 30, 2011 and December 31, 2010 is as follows:

 

     September 30, 2011      December 31, 2010  

Commitments to extend credit

   $ 97,142       $ 94,979   
  

 

 

    

 

 

 

Letters of credit:

     

Standby letters of credit

   $ 25,641       $ 33,072   

Other letters of credit

     674         1,513   
  

 

 

    

 

 

 
   $ 26,315       $ 34,585   
  

 

 

    

 

 

 

Commitments 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 fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for certain lines of credit may expire without being drawn upon. Therefore, 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 management’s 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. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments.

The Bank considers its standby letters of credit to be guarantees. At September 30, 2011, the maximum undiscounted future payments that the Bank could be required to make was $26.0 million. 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 guarantees are fully collateralized; however, several are unsecured. The Bank had not recorded any liabilities associated with these guarantees at September 30, 2011.

 

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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 $183.6 million and $173.5 million at September 30, 2011 and December 31, 2010, respectively. On September 30, 2011 and December 31, 2010, the Bank recorded mortgage servicing rights at their fair value of $1.0 million and $0.9 million, respectively.

Capital Resources

The Bank is subject to various regulatory capital requirements administered by the United States federal banking agencies. Failure 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 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2011 and December 31, 2010, that the Bank met all capital adequacy requirements to which they are subject.

As of September 30, 2011, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for 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 Bank’s actual capital amounts and ratios as of September 30, 2011 and December 31, 2010 are also presented in the table.

 

     Actual     For Capital Adequacy
Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of September 30, 2011:

               

Total capital
(to Risk Weighted Assets)

   $ 95,405         13.85   $ 54,414         8.00   $ 68,018         10.00

Tier 1 capital
(to Risk Weighted Assets)

   $ 86,893         12.78   $ 27,207         4.00   $ 40,811         6.00

Tier 1 capital
(to Average Assets)

   $ 86,893         8.24   $ 44,325         4.00   $ 55,406         5.00

As of December 31, 2010:

               

Total capital
(to Risk Weighted Assets)

   $ 93,286         13.76   $ 54,228         8.00   $ 67,785         10.00

Tier 1 capital
(to Risk Weighted Assets)

   $ 84,813         12.21   $ 27,114         4.00   $ 40,671         6.00

Tier 1 capital
(to Average Assets)

   $ 84,813         8.52   $ 39,816         4.00   $ 49,771         5.00

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on our management’s (including BankGuam’s Chief Executive Officer and Chief Financial Officer) as of end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer have concluded that BankGuam’s “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) were effective to ensure that the information required to be disclosed by BankGuam in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting. There were no changes in BankGuam’s internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonable likely to materially affect, BankGuam’s internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls. Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

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PART II. OTHER INFORMATION

Item 6. Exhibits

 

Exhibit No.   Exhibit
31.01   Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.02   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.01   Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
101   Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Unaudited Condensed Consolidated Statements of Condition as of September 30, 2011 and December 31, 2010, (ii) Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010, (iii) Unaudited Condensed Consolidated Statements of Stockholders’ Equity as of September 30, 2011 and 2010, (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 and (v) Notes to Unaudited Condensed Consolidated Financial Statements

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, BankGuam Holding Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BANKGUAM HOLDING COMPANY
Date: November 14, 2011  

By:

 

/s/ LOURDES A. LEON GUERRERO

   

Lourdes A. Leon Guerrero,

President and Chief Executive Officer

Date: November 14, 2011  

By:

 

/s/ FRANCISCO M. ATALIG

   

Francisco M. Atalig,

Senior Vice President and Chief Financial Officer

 

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