2008
ANNUAL
REPORT
BANK OF GUAM
CORPORATE
INFORMATION
ANNUAL MEETING
The 2009 annual meeting of stockholders will be
held at 7:00 P.M. on Friday, May 1, 2009, in the Bank’s
Hagåtña Branch in its Headquarters Building.
BANK OF GUAM HEADQUARTERS
111 Chalan Santo Papa
Hagåtña, Guam 96910
Tel: (671) 472-5300 • Fax: (671) 477-5454
www.bankofguam.com
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
361 South Marine Corps Drive
Tamuning, Guam 96913-3911
Tel: (671) 646-3884 • Fax: (671) 649-4932
www.deloitte.com
TAX CONSULTANT
Robert J. Steffy, C.P.A.
210 Archbishop Flores Street • Suite 100
Hagåtña, Guam 96910
Tel: (671) 477-7829 • Fax: (671) 477-7845
GENERAL COUNSEL
Arriola, Cowan & Arriola
P.O. Box X
Hagåtña, Guam 96932
Tel: (671) 477-9731 • Fax: (671) 477-9734
STOCKS
Effective February 2, 2009, Computershare Trust Company,
N.A. (“Computershare”) is now the Registrar, Stock Transfer
and Dividend Disbursing Agent for Bank of Guam’s common
stock, with duties that include: stock transfers, dividend payments, address changes and lost certificate replacements.
Computershare Trust Company, N.A.
for written requests, please write to:
Computershare Shareholder Services
PO Box 43078 • Providence, RI 02940
for written requests, by overnight delivery:
Computershare Shareholder Services
250 Royall Street
Canton, MA 02021
Tel: 1-(888) 835-5678 (U.S., Canada, Puerto Rico & Guam)
Tel: 1-(312) 360-5193 (non U.S.)
www.computershare.com/investor
The shares of the Bank are now traded privately among individual stockholders, investors, and in the over-the-counter
market. The stock prices of such trades vary with each transaction.
OTHER FINANCIAL SERVICES
Bank of Guam Trust Services*
Headquarters Building • 6th Floor
111 Chalan Santo Papa
Hagåtña, Guam 96910
Tel: (671) 472-5713 • Fax: (671) 472-5527
Bank of Guam Financial Services*/PrimeVest®
Headquarters Building • 7th Floor
111 Chalan Santo Papa
Hagåtña, Guam 96910
Tel: (671) 472-5490 • Fax: (671) 472-1580
BankGuam Insurance Underwriters, Ltd.*
Headquarters Building • 1st Floor
111 Chalan Santo Papa
Hagåtña, Guam 96910
Tel: (671) 479-2262/65/67 • Fax: (671) 479-2266
MEMBER
Federal Deposit Insurance Corporation
American Bankers Association
Guam Bankers Association
California Bankers Association
Western Independent Bankers Association
Western States Card Services
Saipan Bankers Association
GOVERNMENT SUPERVISION
Federal Deposit Insurance Corporation
Guam Banking Commission
California Superintendent of Banks
Commonwealth of the Northern Mariana Islands
Department of Commerce
Federated States of Micronesia Banking Board
Republic of Palau Financial Institutions Commission
Republic of the Marshall Islands Banking Commission
*Investment, trust and insurance services offered by Bank of Guam are (1) not insured by the Federal Deposit Insurance Corporation, any government
agency, or any other deposit insurance program; (2) not deposits with, obligations of, or guaranteed by Bank of Guam; and (3) subject to investment risk,
including possible loss of the principal amount invested.
CONTENTS
Corporate Information .......................................... Inside Cover
Message to Stockholders ...................................................... 2
Corporate Highlights .............................................................. 4
Independent Auditors’ Report .............................................. 5
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................................ 27
Senior Management, Headquarters &
Branch Officials ................................................................... 38
Board of Directors ................................................................. 39
FINANCIAL HIGHLIGHTS
[$ in thousands, except per share data]
At December 31st
2008
2007
Change in
Amount
Change in
%
$ 28,995
$
3,499
$ 69,326
$
943
$ (77,477)
$
2,450
$ (2,279)
3.5%
0.5%
15.5%
10.5%
(26.8%)
3.1%
(26.8%)
$
$
$
$
$
$
$
784,489
694,287
414,472
8,891
254,492
75,359
9,510
2006
Total assets
Total deposits
Net loans
Reserve for loan losses
Investment securities
Stockholders’ equity
Net income
$
$
$
$
$
$
$
858,277
739,663
515,168
9,943
211,537
81,014
6,209
$
$
$
$
$
$
$
829,282
736,164
445,842
9,000
289,014
78,564
8,488
Cash dividends declared
$
4,312
$
6,222
$
(1,910)
(30.7%)
$
4,296
PER SHARE
Net income per share - basic
Net income per share - diluted
$
$
0.72
0.70
$
$
0.99
0.96
$
$
(0.27)
(0.26)
(27.3%)
(27.1%)
$
$
1.11
1.08
Cash dividends declared: common stock
$
0.50
$
0.73
$
(0.23)
(31.5%)
$
0.50
Book value per share
(8,667,682 shares issued/8,635,506 shares outstanding) $
9.38
$
9.13
$
0.25
2.7%
$
8.76
CASH DIVIDENDS DECLARED PER QUARTER
2008 Stock
2007 Stock
1st Qtr.
$
$
0.125
0.350
2nd Qtr.
$
$
0.125
0.125
3rd Qtr.
$
$
0.125
0.125
4th Qtr.
$
$
0.125
0.125
Total/Yr.
$
$
0.500
0.725
MESSAGE TO
STOCKHOLDERS
Buenas yan Hafa Adai! More than thirty-seven years ago, my father,
Jesus Leon Guerrero, made a very bold move: Despite what so many
people had told him, including some of the top leaders of our community at the time, he was resolute in his efforts to prove that the people
of Guam could accomplish whatever we set our minds to; he was determined to start one of the most complicated types of businesses, and to
do it with local resources, local personnel and local capital. Now, thirty-seven years later, there is no doubt that his
vision was clear, that his belief in the abilities of our people was fully justified. With our collective efforts, our Bank
succeeded. Today, ten years after my father’s book, Jesus in Little America, was published, it may be easy for us to
take the success of Bank of Guam for granted, but the truth is that there is still a lot of vigorous work and creative
thought required to continue the success that my father achieved.
Last year was extraordinarily difficult for the banking industry, whether in Guam, in the United States, or anywhere
else in the world. As a result of a series of irresponsible decisions combined with inadequate government supervision in financial markets and a variety of exotic financial instruments that few really understood, the nation and the
world fell into the most severe financial crisis that we have known in generations. As the situation disintegrated
from bad to worse, one of the first reactions was to force interest rates to unprecedented low levels. Unfortunately
for many banks, this just made matters worse as interest margins were squeezed to dismal levels. As I write this
message, the chaos in the industry has still not been resolved, and economic conditions around the globe continue
to deteriorate.
Our Bank has been spared this turmoil due to the conservative practices of management and the foresight of risk
mitigation. We were sensible enough to avoid investing in sub-prime mortgages and their associated derivative
instruments, so the collapse of that market had no direct effect on us. We were also prudent enough to restructure
our securities portfolio to avoid investments that were insured by third parties that had also insured so-called toxic
instruments. As a result, we actually realized a gain of more than $1.4 million on our portfolio for the year. We saw
our deposits grow by $3.5 million and converted some of our investments to loans, always in line with our stringent
credit criteria, raising our net loans by more than 15.5%, to over $515 million, and our loan-to-deposit ratio to
71.0%. Your shareholders’ equity increased by almost $2.5 million, to more than $81.0 million, even after paying
consistent quarterly dividends that totaled $4.3 million. By each of the standard measures, Bank of Guam continues
to be well capitalized.
Our Bank is strong, and our stockholders remain, as always, quite astute.
That is not to say that everything went as well as we would have liked. Because of compressed interest margins,
our net interest income fell by $1.7 million, or 4.0%, to $40.2 million. With seemingly unrelenting increases in
costs, our overhead expenses grew by $1.1 million, and combined with our vigilant provision for loan losses of $2.4
million (among other factors), this reduced our net operating income by $3.5 million, or 28.8%, to $8.6 million.
Nonetheless, in an adverse environment in which many U.S. banks lost substantial sums during the year, our Bank
succeeded once again and earned an after-tax profit of $6.2 million. Although this marked a decrease of $2.3 million
from the previous year, it represents a return on equity (ROE) of 8.0%, comparing favorably to our peer group’s ROE
2
of 6.3%. Similarly, our return on assets (ROA) of 0.7% was significantly better than our peers’ 0.6%. Our world class
management team and our diligent employees overcame the year’s many obstacles and turned in an exceptional
performance once again.
Living in small, remote communities, many islanders mistakenly think that we are far behind the larger, industrialized nations in our skills, our abilities and our level of sophistication. We know this perception is not true. Our
performance relative to our peer group is evidence of this, but there are other examples, too. One of those was displayed in 2008 when Bank of Guam won not one, not two, but three first place awards in marketing by the American
Bankers Association, in the categories of financial education, inspiration and internal branding. We are proud of
our accomplishments.
We are even more proud of our community outreach. In addition to our contributions each year to dozens of worthy charities and causes throughout the region, we sponsor internal fundraisers for the American Cancer Society
and earned first place recognition for the local community’s largest annual fundraising event. We also sponsor an
annual “Run for the Red” 5K run/walk for the benefit of the American Red Cross. Most of our officers and many of
our staff are directly involved, often in leadership capacities, in civic organizations dedicated to improving the lives
of everyone in our communities. While many might consider the time and effort expended to be sacrifices, we know
that our involvement is its own reward. In contrast to many other businesses, whether in or outside of the banking
industry, we are generous in giving back to the communities we serve.
In keeping with our Bank’s long-standing traditions, we also continue to take care of our own. Bank of Guam’s
employees are among the most highly educated and trained personnel of any major firm in the region. To maintain
this lead, we devote significant resources to our internal training programs, and we provide more universal training
and cross-training to everyone in the organization, from our Board of Directors down through senior and middle
management to the newest members of our staff. We also encourage our personnel to further their formal education, and assist them in their efforts to earn a college degree. Then, to retain the talent that we have attracted and
developed, we pay highly competitive wages and salaries, and offer a comprehensive benefits package that few other
firms in the region can match.
On a more serious note, given the disturbing events in the last twelve months in the nation’s and the world’s economies and financial markets, we are vigilant concerning the immediate future of our Bank and the well-being of the
people in the markets where we operate. As we have for the past thirty-seven years, we are keeping a close watch
on the condition of each of our customers and the larger circumstances that surround them and our institution.
Although we are wary about national and world events, we are very optimistic about the prospective fortunes of
Guam and, to a lesser extent, the Commonwealth of the Northern Mariana Islands. Even in the face of a widening
economic downturn, we are confident that our principal markets will excel during the next several years.
I want to extend my gratitude and that of our Board of Directors, management and staff to you, our stockholders,
for your continued confidence in Bank of Guam. No matter how strong and astute we might be in business, none
of this would be possible without you and the resources that you have contributed in support of our endeavors. As
you review this annual report, I hope that you will find that your confidence and support are truly warranted, and
that we have earned your patronage for 2009 and beyond.
Si Yu´us Ma´asé,
Lourdes (Lou) A. Leon Guerrero
PRESIDENT & CHA IR
OF THE
BOA RD
3
CORPORATE HIGHLIGHTS
Bank of Guam gained national recognition by winning the 7th Overall Community
Fundraising Team Award in the High Plains
Division during the 2008 American Cancer Society’s Guam Relay for Life, raising $40,566.00.
Bank of Guam won the American BankersAssociation (ABA)
Financial Marketing Awards for the second consecutive year,
winning honors in Financial Education, Inspiration and
Internal Branding.
(ABOVE)
(RIGHT) Bank of Guam was honored for our “Hafa
Adai Spirit” by the Guam Visitors Bureau during
the 2008 Excellence in Tourism Awards.
It’s Always
All about…
Familia
ANN MARIE MUNA
Guam Small Business Administration Women in Business Champion of the Year
2008 SBA Award Winners
nominated by Bank of Guam
The Bank of Guam
Family salutes and
congratulates the
families & friends of
(ABOVE) Ann Marie Muna
and (RIGHT) Dolores
(Laling) M. Pangelinan
for their support of our
outstanding nominees
and winners.
DOLORES (LALING) M. PANGELINAN
4
Guam Small Business Administration Home-Based Business Champion of the Year
INDEPENDENT AUDITORS’ REPORT
Deloitte & Touche LLP
361 South Marine Corps Drive
Tamuning, GU 96913-3911
USA
Tel: (671)646-3884
Fax: (671)649-4932
www.deloitte.com
To the Board of Directors and Shareholders
of the Bank of Guam:
We have audited the accompanying consolidated statements of condition of the Bank of
Guam and subsidiaries (the “Bank”) as of December 31, 2008 and 2007, and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years ended December 31, 2008. These financial
statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Deloitte & Touche Audit Report
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Bank of Guam and subsidiaries as of December 31,
2008 and 2007 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
February 24, 2009
Member of
Deloitte Touche Tohmatsu
5
[In thousands, except par value]
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
2008
2007
Assets
Cash and due from banks
Federal funds sold
Interest bearing deposits with banks
Total cash and cash equivalents
Interest bearing deposits with banks
Investment securities available for sale
Investment securities held to maturity
Federal Home Loan Bank stock, at cost
Loans, net of allowance for loan losses
(2008: $9,943 and 2007: $9,000)
Accrued interest receivable
Premises and equipment, net
Goodwill
Other assets
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Accrued interest payable
FHLB advances
Other liabilities
Total liabilities
$ 28,070
55,000
5,021
$ 22,937
18,400
48
88,091
41,385
5,154
160,729
48,610
2,198
10,154
226,442
60,374
2,198
515,168
4,133
22,571
783
10,840
445,842
4,440
23,498
783
14,166
$ 858,277
$ 829,282
$ 205,333
534,330
$ 193,742
542,422
739,663
736,164
972
35,000
1,628
1,949
10,000
2,605
777,263
750,718
1,813
13,097
66,616
(222)
1,801
12,839
64,719
(505)
81,304
(290)
78,854
(290)
81,014
78,564
$ 858,277
$ 829,282
Commitments and contingencies
Deloitte & Touche Audit Report
Stockholders’ equity:
Common stock $0.2083 par value; 48,000 shares authorized;
8,668 and 8,634 shares issued and 8,636 and
8,602 shares outstanding at 2008 and 2007, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Common stock in treasury, at cost (32 shares)
Total stockholders’ equity
6
SEE ACCOMPANYING
NOTES TO CONSOLIDATED
FINANCIAL STA TEMEN TS .
CONSOLIDATED STATEMENTS OF INCOME
[In thousands, except per share amounts]
Years Ended December 31,
2007
2006
$ 37,413
11,568
636
404
$ 39,571
12,671
1,602
425
$ 37,666
11,112
1,352
363
50,021
54,269
50,493
4,640
4,022
1,181
7,055
4,843
524
5,747
3,985
460
9,843
12,422
10,192
40,178
41,847
40,301
2,400
929
2,050
37,778
40,918
38,251
3,854
6,864
4,103
5,883
3,733
5,680
10,718
9,986
9,413
18,047
5,740
4,885
11,206
17,419
5,288
4,481
11,606
15,232
5,128
4,286
9,445
Total non-interest expenses
39,878
38,794
34,091
Income before income taxes
8,618
12,110
13,573
2,409
3,622
4,063
Interest income:
Loans
Investment securities
Federal funds sold
Deposits with banks
Total interest income
Interest expense:
Time deposits
Savings deposits
Other borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income, after provision for loan losses
Non-interest income:
Service charges and fees
Other income
Total non-interest income
Non-interest expenses:
Salaries and employee benefits
Occupancy
Furniture and equipment
General, administrative and other
Income tax expense
Net income
Earnings per share:
Basic
Diluted
SEE ACCOMPANYING
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
.
$
6,209
$
8,488
$
9,510
$
0.72
$
0.99
$
1.11
$
0.70
$
0.96
$
1.08
Deloitte & Touche Audit Report
2008
7
[In thousands]
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
2008
2007
2006
Net income
$
Other comprehensive loss, net of tax effects:
Unrealized holding (loss) gain on available-for-sale securities
arising during the period
Reclassification for gains realized on available-for-sale
securities during the period
Amortization of unrealized holding loss on held-to-maturity
securities during the period
6,209
8,488
$
9,510
(1,240)
795
284
1,430
75
-
93
106
105
283
976
389
Total other comprehensive income
Comprehensive income
$
$
6,492
$
9,464
$
9,899
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
Deloitte & Touche Audit Report
Common stock:
Balance at beginning of year (8,634, 8,599 and 9,975 shares,
respectively)
Common stock issued to employees
(34, 35 and 18 shares issued, respectively)
Retirement of common stock in treasury (1,394 shares)
Balance at end of year (8,668, 8,634 and 8,599 shares, respectively)
Additional paid-in capital:
Balance at beginning of year
Common stock issued to employees
Retirement of common stock in treasury
Balance at end of year
Common stock in treasury
Balance at beginning of year
Purchase of common stock (32 shares)
Retirement of common stock in treasury (1,394 shares)
Balance at end of year
Accumulated other comprehensive loss:
Balance at beginning of year
Change in unrealized loss on securities available for sale,
net of reclassification adjustment and tax effects
Change in unrealized loss on securities held to maturity,
net of reclassification adjustment and tax effects
Balance at end of year
Retained earnings:
Balance at beginning of year
Net income
Cash dividends declared
Retirement of common stock in treasury
Balance at end of year
Total stockholders’ equity
8
Years Ended December 31,
2008
2007
2006
$
1,801
$
1,792
$
2,079
12
1,813
9
1,801
3
(290)
1,792
12,839
258
13,097
12,595
244
12,839
14,154
118
(1,677)
12,595
(290)
(290)
(290)
(290)
(15,331)
15,331
-
(505)
(1,481)
(1,870)
190
870
284
93
(222)
106
(505)
105
(1,481)
64,719
6,209
(4,312)
66,616
$ 81,014
62,453
8,488
(6,222)
64,719
$ 78,564
70,603
9,510
(4,296)
(13,364)
62,453
$ 75,359
SEE ACCOMPANYING
NOTES TO CONSOLIDATED
FINANCIAL STA TEMEN TS .
[In thousands]
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses
Depreciation and amortization
Amortization of fees, discounts and premiums
Writedown and loss on sales of foreclosed assets
Decrease (increase) in mortgage servicing rights
Realized gain on sale of available-for-sale securities
Loss on disposal of premises and equipment
Net change in:
Accrued interest receivable
Other assets
Accrued interest payable
Other liabilities
Years Ended December 31,
2008
2007
2006
$
6,209
$
8,488
$
9,510
929
2,527
(2,056)
164
(175)
(75)
108
2,050
2,940
(3,055)
430
174
146
307
2,676
(977)
(977)
152
(188)
343
(632)
(1,046)
(3,723)
515
(1,686)
Net cash provided by operating activities
11,290
9,585
6,255
Cash flows from investing activities:
Net change in interest bearing deposits with banks
Purchases of securities available for sale
Proceeds from sales of securities available for sale
Maturities, prepayments and calls of securities available for sale
Maturities, prepayments and calls of securities held to maturity
Loan originations and principal collections, net
Proceeds from sales of loans
Proceeds from sales of foreclosed real estate
Proceeds from sales of premises and equipment
Additions to premises and equipment
5,000
(484,049)
156,805
395,174
11,468
(89,375)
18,493
193
65
(2,815)
(10,154)
(514,846)
33,441
438,227
12,265
(45,478)
12,863
406
(2,225)
(466,995)
493,061
17,555
(27,142)
11,134
3,354
(2,454)
10,959
(75,501)
28,513
3,499
25,000
270
(4,312)
41,877
(5,000)
5,000
253
(6,222)
(14,792)
(5,000)
5,000
121
(4,296)
24,457
35,908
(18,967)
46,706
41,385
(30,008)
71,393
15,801
55,592
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase in deposits
Payment of FHLB advances
Proceeds from FHLB advances
Proceeds from issuance of common stock
Dividends paid
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Supplemental schedule of noncash investing and financing activities:
Sale of premises and equipment through bank financing
Foreclosed assets transferred from loans, net
Transfer of foreclosed assets to loans
Transfer of bank shares in satisfaction of a loan receivable
SEE ACCOMPANYING
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
.
$
88,091
$
41,385
$
71,393
$
10,820
1,877
$
12,079
5,518
$
9,677
6,569
$
585
225
(484)
-
$
118
(92)
290
$
744
(128)
-
Deloitte & Touche Audit Report
2,400
3,064
(38)
46
2
(1,450)
28
9
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Basis of
Presentation
The consolidated financial statements include the accounts
of the Bank of Guam (the Bank) and its wholly-owned
subsidiaries, BankGuam Properties, Inc. and BankGuam
Insurance Underwriters, Ltd. All significant intercompany
and interbranch balances and transactions have been eliminated in consolidation.
Assets held by the Bank’s Trust department in a fiduciary
capacity are not assets of the Bank, and, accordingly, are not
included in the accompanying consolidated financial statements.
Deloitte & Touche Audit Report
Business
The Bank provides a variety of financial services to individuals, businesses and governments through its branches.
The Bank’s headquarters is located in Hagatna, Guam and
it operates branches located on Guam, the Commonwealth
of the Northern Mariana Islands (CNMI), the Federated
States of Micronesia (FSM), the Republic of the Marshall
Islands (RMI), the Republic of Palau and the United States of
America. The Bank currently has twelve branches in Guam,
three in the CNMI, two in the FSM, one in the RMI, one in
Palau, and one in San Francisco. Its primary deposit products
are demand deposits, savings and term certificate accounts
and its primary lending products are consumer, commercial
and real estate loans.
10
Risks and Uncertainties
In the normal course of its business, the Bank encounters two
significant types of risks: economic and regulatory. There are
three main components of economic risk: interest rate risk,
credit risk and market risk. The Bank is subject to interest
rate risk to the degree that its interest-bearing liabilities
mature or re-price at different speeds, or on a different basis,
than its interest-earning assets. Incorporated into interest
rate risk is prepayment risk. Prepayment risk is the risk
associated with the prepayment of assets, and the write-off
of premiums associated with those assets, if any, should interest rates fall significantly. Credit risk is the risk of default,
primarily in the Bank’s loan portfolio that results from the
borrower’s inability or unwillingness to make contractually
required payments. Market risk reflects changes in the value
of securities, the value of collateral underlying loans receivable and valuation of real estate owned. Credit and market
risks can be affected by a concentration of business in the
Pacific Rim and California, United States of America.
The Bank is subject to the regulations of various government agencies. These regulations may change significantly
from period to period. Such regulations can also restrict the
growth of the Bank as a result of capital requirements. The
Bank also undergoes periodic examinations by the regula-
tory agencies, which may subject it to further changes with
respect to asset valuations, amounts of required loss allowances and operating restrictions. Such changes may result
from the regulators’ judgments based on information available to them at the time of their examination.
Use of Estimates
The preparation of consolidated financial statements in
accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income
and expenses during the periods presented. 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 real estate owned and fair value measurement, including the determination of other-than-temporaryimpairment of investment securities.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows,
cash and cash equivalents include cash on hand and balances
due from banks, federal funds sold, and interest bearing
deposits with banks, all of which mature within ninety days.
The Bank is required by the Federal Reserve System to maintain non-interest earning cash reserves against certain of
their deposit accounts. At December 31, 2008 and 2007, the
required combined reserves totaled approximately $13,011
and $12,661, respectively.
Interest Bearing Deposits with Banks
Interest-bearing deposits with banks mature within one year
and are carried at cost.
Investment Securities
The Bank accounts for investment securities based on their
classification as trading, available-for-sale or held-to-maturity. Securities are classified in accordance with management’s intention regarding their retention. Accounting
for each group of securities follows the requirements of
Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity
Securities. Investments in the trading category are carried
at fair value with unrealized gains and losses recorded
in earnings. Investments in the available-for-sale category
are recorded at fair value with unrealized gains and losses
excluded from earnings and reported net of tax in other
comprehensive income. Gains and losses on the sale of
investment securities are recorded on the trade date and
are determined using the specific identification method.
Investments in the held-to-maturity category are recorded
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[In thousands, except per share data]
December 31, 2008, 2007 and 2006
(Note 1: Summary of Significant Accounting Policies, Continued…)
…Investment Securities, Continued
at amortized cost. For investments classified as held-tomaturity, premiums and discounts are initially recorded as
part of the investment securities’ balance, and are amortized or accreted, respectively, to interest income on the
straight-line method, which approximates the interest yield
method, over the period to maturity (call dates, if earlier, with respect to premiums) of the related securities.
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized losses. In evaluating other-than-temporary impairment losses, management considers (1) the length of time
and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects
of the issuer, and (3) the intent and ability of the Bank to
retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Management evaluates securities for other-than-temporary
impairment on an annual basis, and more frequently when
economic or market concerns warrant such evaluation.
Loans
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off generally
are reported at their outstanding unpaid principal balances
adjusted for charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest
income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are
deferred and recognized in income using the straight-line
method over the contractual life of the loans. Differences
between this method and the interest method are not significant and do not otherwise materially affect the accompanying
consolidated financial statements.
The Bank accounts for impaired loans in accordance with
SFAS No. 114, Accounting by Creditors for Impairment of a
Loan. SFAS No. 114 requires that impaired loans be mea-
Allowance for Loan Losses
The allowance for loan losses is maintained at a level adequate
to provide for losses that can reasonably be anticipated. The
allowance for loan losses is increased by provisions charged
to earnings. Loan losses or charge-offs are charged against
the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance. The provision for loan losses
is based on management’s evaluation of the adequacy of the
allowance for loan losses. Such evaluation encompasses consideration of past loss experience and other factors, including
change in composition and volume of the loan portfolio, the
relationship of the allowance to the portfolio and other economic conditions. The allowance is based on estimates and
ultimate losses may differ from current estimates.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Bank has entered
into commitments to extend credit, including commitments
under credit card arrangements, commercial letters of credits and standby letters of credit. Such financial instruments
are recorded when they are funded.
Loans Held for Sale and Mortgage
Servicing Rights (MSR)
Mortgage loans originated and intended for sale in the
secondary market are carried at cost, which approximates
market value. Gains and losses are recognized upon the sale
of loans.
On January 1, 2007, the Bank adopted SFAS No. 156
Accounting for Servicing of Financial Assets and has accordingly made an election to subsequently measure all of its
MSRs at fair value. No fair value adjustment was recorded
as of January 1, 2007, the date of adoption, as the difference
between amortized book value and fair value was insignificant. The Bank recognized servicing assets of $719 and $721
at December 31, 2008 and 2007, respectively, based on estimated present value of net future cash flows, discounted by a
rate composed of two components: a risk-free rate plus a risk
premium. The risk-free rate selected is the yield on ten year
US Federal Government bonds of term similar to the future
mean term of the outstanding servicing portfolio.
Deloitte & Touche Audit Report
Loans are placed on a nonaccrual status when principal or
interest is past due on a contractual basis 90 days or more
and the loan is not fully collateralized or when, in the opinion
of management, principal and interest is not likely to be paid
in accordance with its terms. At the time the loan is placed
on a nonaccrual basis, interest previously recorded but not
collected is reversed against current income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest
amounts contractually due are brought current and future
payments are reasonably assured, or the loan is sufficiently
secured and is in the process of collection.
sured based on the present value of expected future cash
flows discounted at the loan’s effective interest rate, or as a
practical expedient, at the loan’s observable market price or
the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the
recorded balance of the loan, the impairment is recorded
through a valuation allowance included in the allowance for
loan losses. The Bank considers a loan to be impaired when,
based on current information and events, it is probable the
Bank will be unable to collect all amounts due (principal and
interest) according to the contractual terms.
11
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 1: Summary of Significant Accounting Policies, Continued…)
Premises and Equipment
Premises and equipment are reported at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the
estimated useful lives of the related assets. Depreciation
expense has been computed principally using estimated lives
of 15 to 40 years for premises and 5 to 10 years for furniture
and equipment. Leasehold improvements are amortized
ratably over the shorter of the respective lease term or the
estimated useful lives of the improvements.
Construction-in-progress consists of accumulated direct and
indirect costs associated with the Bank’s construction of
premises and the purchase of equipment which have not
been placed in service and, accordingly, have not been
subjected to depreciation. Such assets are depreciated over
their estimated useful lives when completed and placed in
service.
Foreclosed Assets
Properties acquired through, or in lieu of, loan foreclosure
are held for sale and are initially recorded at the lower of the
carrying amount of the loan or the fair value of the property
reduced by estimated selling costs. Write-downs of the asset
at, or prior to, the date of foreclosure are charged to the allowance for losses on loans. A valuation allowance is increased
by provisions charged to earnings. Subsequent write-down,
income and expense incurred in connection with holding
such assets, and gains and losses realized from the sales of
such assets are charged to the valuation allowance.
Goodwill
Goodwill is deemed to have an indefinite life and is not
amortized but is tested at least annually for impairment in
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets.
Deloitte & Touche Audit Report
Treasury Stock
Shares of common stock that are repurchased by the Bank
are recorded as “common stock in treasury”, a reduction of
12
shareholders’ equity and under the cost method of accounting. The Bank acquired and retired 32 shares and 1,394
shares of common stock in treasury during the year ended
December 31, 2007 and 2006, respectively.
Income Taxes
Income taxes represent taxes recognized under laws of the
Government of Guam, which generally conform to U.S.
income tax laws. Foreign income taxes result from payments
of taxes with effective rates ranging from 2% to 5% of gross
income of the Commonwealth of the Northern Mariana
Islands, the FSM, the RMI and Palau to their respective government jurisdictions. U.S. Federal and California income
taxes have been reflected as foreign taxes for financial reporting purposes.
The Bank accounts for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Deferred income tax
assets and liabilities are determined using the liability (or
balance sheet) method. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of
the temporary differences between the book and tax bases of
the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
Dividends Declared
At its discretion, the Bank declares dividends to stockholders of record as of the declaration date. The Bank declared
and paid dividends of $0.125 per each share of common
stock outstanding for each of the quarters in 2008 and 2007.
In February 2007, a special dividend of $0.225 cents was
declared and paid.
Comprehensive Income
U.S. GAAP requires that recognized revenue, expenses, gains
and losses be included in net income. Although, certain
changes in assets and liabilities, such as unrealized gains
and losses on available-for-sale securities, are reported as a
separate component of the equity section of the consolidated
statement of condition, such items, along with net income,
are components of comprehensive income.
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:
2008
2007
2006
Average number of common shares outstanding
Effect of dilutive options
8,642
226
8,615
216
8,588
201
Average number of common shares outstanding
used to calculate diluted earnings per common share
8,868
8,831
8,789
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
Note 2 - Recently Issued Accounting Pronouncements
Accounting for Fair Value Measurement
SFAS No. 157, Fair Value Measurements, which became effective for the Bank on January 1, 2008, establishes a framework
for measuring fair value, while expanding fair value measurement disclosures. SFAS No. 157 establishes fair value
hierarchy that distinguishes between independent observable
inputs and unobservable inputs based on the best information
available. SFAS No. 157 expands disclosures about the use of
fair value to measure assets and liabilities, the effect of these
measurements on earnings for the period, and the inputs
used to measure fair value. In February 2008, the Financial
Accounting Standards Board (“FASB”) issued Staff Position
(“FSP”) FAS 157-1 to exclude SFAS No. 13 Accounting for
Leases and its related interpretive accounting pronouncements that address leasing transactions, from the scope of
SFAS No. 157. In February 2008, the FASB also issued FSP
FAS 157-2 to allow entities to electively defer the effective
date of SFAS No. 157 for nonfinancial assets and liabilities,
except for those items recognized or disclosed fair value on
an annual or more frequently recurring basis, until January 1,
2009. The Bank will apply the fair value measurement provisions of SFAS No. 157 to its nonfinancial assets and liabilities
measured at fair value effective January 1, 2009. The adoption
of SFAS 157 for financial assets and liabilities had no impact
on the Bank’s financial position or results of operations.
The Fair Value Option for Financial Assets
and Financial Liabilities
SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB
Statement No. 115, which became effective for the Bank on
January 1, 2008, provides entities with an option to report
selected financial assets and financial liabilities at fair value,
on an instrument by instrument basis. The Bank has not
elected the fair value option, and therefore, there was no
impact on the Bank’s financial statements.
The Hierarchy of Generally Accepted
Accounting Principles
In May 2008, the FASB issued SFAS No. 162, The Hierarchy
of Generally Accepted Accounting Principles. The Statement
identifies the sources of accounting principles and establishes a hierarchy for selecting those principles to prepare
financial statements in accordance with US GAAP. The
Statement is effective 60 days following the Security Exchange
Commission’s approval of the Public Company Accounting
Oversight Board (PCAOB) amendments to AU Section 411,
The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. Management believes that
the adoption of this Statement will not have any impact on the
Bank’s financial position or results of operations.
Determining the Fair Value of a Financial
Asset When the Market for That Asset is
Not Active
In October 2008, the FASB issued FSP FAS 157-3, Determining
the Fair Value of a Financial Asset When the Market for That
Asset is Not Active. The FSP provides guidance clarifying how
SFAS No. 157 should be applied when valuing securities in
markets that are not active. The guidance states that significant judgment is required in valuing financial assets and
clarifies how management’s internal assumptions should be
considered when relevant observable data does not exist, how
the use of market quotes should be considered when assessing the relevance of observable and unobservable data available to measure fair value. The FSP is effective upon issuance
and includes financial statements for the year ended and as of
December 31, 2008. At adoption, there was no impact on the
Bank’s financial position or results of operations.
Note 3 - Investment Securities
The amortized cost and fair value of investment securities, with gross unrealized gains and losses, follows:
Securities Available for Sale
U.S. Treasury obligations
U.S. Municipal Bonds
U.S. Government agencies and sponsored
agencies mortgage-backed securities
Securities Held to Maturity
U.S. Government agencies and sponsored
agencies mortgage-backed securities
Gross
Gross
Amortized Unrealized Unrealized
Fair
Cost
Gains
Losses
Value
$
2,245
$
5
$
$
2,250
22,509
43
(635)
21,917
135,070
1,922
(430)
136,562
$ 160,729
$ 159,824
$
1,970
$
(1,065)
$
$
250
$
(242)
48,610
$
48,618
Deloitte & Touche Audit Report
2008
13
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 3: Investment Securities, Continued…)
2007
Securities Available for Sale
U.S. Treasury obligations
U.S. Government agencies and sponsored
agencies debt securities
U.S. Municipal Bonds
U.S. Government agencies and sponsored
agencies mortgage-backed securities
Gross
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
$
39,155
$
48
$
(3)
Fair
Value
$
39,200
35,922
45,232
469
125
(12)
(524)
36,379
44,833
105,518
714
(202)
106,030
$ 225,827
$
1,356
$
(741)
$ 226,442
$
$
11
$
(987)
$
Securities Held to Maturity
U.S. Government agencies and sponsored
agencies mortgage-backed securities
60,374
59,398
At December 31, 2008 and 2007, investment securities with a carrying value of $86,277 and $172,635, 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 December 31, 2008, follows:
Available for Sale
Amortized
Cost
Due within one year
Due after five but within ten years
Due after ten years
$
2,357
5,320
17,077
Fair
Value
$
2,362
5,325
16,480
24,754
135,070
24,167
136,562
$ 159,824
$ 160,729
Mortgage-backed securities
Held to Maturity
Amortized
Cost
$
-
Fair
Value
$
48,610
$
48,610
48,618
$
48,618
Deloitte & Touche Audit Report
For the year ended December 31, 2008 and 2007, proceeds from sales of available-for-sale securities amounted to $156,805 and
$33,441, respectively. There were no sales of available-for-sale securities in 2006. Gross realized gains and losses amounted
to $1,818 and $368, respectively for the year ended December 31, 2008 and $215 and $139, respectively, for the year ended
December 31, 2007.
14
Information pertaining to securities with gross unrealized losses at December 31, 2008 and 2007, aggregated by investment
category and length of time that individual securities have been in a continuous loss position, follows:
2008
Securities Available for Sale
U.S. Municipal bonds
U.S. Government agencies and sponsored
agencies mortgage-backed securities
Securities Held to Maturity
U.S. Government agencies and sponsored
agencies mortgage-backed securities
Less Than Twelve Months
Over Twelve Months
Unrealized
Fair
Loss
Value
$
522
$ 13,591
Unrealized
Fair
Loss
Value
$
113
$
3,485
19
1,741
411
18,787
$
541
$
15,332
$
524
$
22,272
$
54
$
9,075
$
188
$
10,702
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 3: Investment Securities, Continued…)
2007
Securities Available for Sale
U.S. Treasury obligations
U.S. Government agencies and sponsored
agencies debt securities
U.S. Municipal Bonds
U.S. Government agencies and sponsored
agencies mortgage-backed securities
Less Than Twelve Months
Over Twelve Months
Unrealized
Fair
Loss
Value
$
3
$ 12,397
Unrealized
Fair
Loss
Value
$
$
-
12
518
16,929
30,352
6
1,505
202
29,848
-
-
$
735
$
89,526
$
6
$
1,505
$
47
$
4,217
$
940
$
53,190
Securities Held to Maturity
U.S. Government agencies and sponsored
agencies mortgage-backed securities
At December 31, 2008, the unrealized losses associated with U.S. Treasury obligations, government agency debentures, U.S.
sponsored agency debentures and mortgage-backed securities are not considered to be other-than-temporary because their
unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or
issuer. The Bank has the intent and ability to hold the debt securities for a period of time sufficient to allow for any anticipated
recovery in fair value.
Note 4 - Loans
A summary of the balances of loans at December 31, 2008 and 2007 follows:
2008
Commercial
Consumer
Real estate
Government
Other
Gross loans
Less: net deferred loan fees
Less: allowance for loan losses
Net loans
2007
$ 333,365
84,629
79,367
26,036
2,924
$ 293,083
78,657
71,560
9,679
2,973
526,321
1,210
9,943
455,952
1,110
9,000
$ 515,168
$ 445,842
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 $143,200 and $142,864 at December 31, 2008 and 2007, respectively. On December 31, 2008 and 2007, the Bank recorded mortgage servicing rights at their fair value of $719 and $721,
respectively.
At December 31, 2008, loans outstanding were comprised of approximately 79% variable rate loans and 21% fixed rate loans.
Deloitte & Touche Audit Report
At December 31, 2008 and 2007, loans to directors and executive officers of the Bank amounted to $14,489 and $20,156, respectively. These loans were extended in the normal course of business and at prevailing interest rates. At December 31, 2008 and
2007, undisbursed commitments amounted to $4,946 and $6,464, respectively.
15
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 4: Loans, Continued…)
A summary of the changes in the allowance for loan losses for the years ended December 31, 2008, 2007 and 2006, follows:
2008
2007
2006
Balance at beginning of year
Provision for loan losses
Loans charged-off
Recoveries of loans previously charged-off
$
9,000
2,400
(2,681)
1,224
$
8,891
929
(2,094)
1,274
$
8,655
2,050
(3,075)
1,261
Balance at end of year
$
9,943
$
9,000
$
8,891
The following is a summary of information pertaining to impaired loans:
2008
2007
Total impaired loans, all with a valuation allowance
$
9,746
$
5,454
Valuation allowance related to impaired loans
$
1,331
$
900
Total non-accrual loans
$
9,536
$
5,455
Total loans past-due ninety days or more and still accruing
$
2,085
$
1,217
2008
2007
2006
Average investment in impaired loans
$
7,600
$
6,779
$
8,311
Interest income recognized on impaired loans
$
226
$
61
$
228
Interest income recognized on a cash basis
on impaired loans
$
226
$
61
$
228
Note 5 - Premises and Equipment
A summary of premises and equipment at December 31, 2008 and 2007 follows:
2008
Cost
Accumulated
Depreciation
Net
Book Value
27,568
$ (13,382)
$
21,445
(16,324)
5,121
Automobiles and mobile facilities
1,342
(692)
650
Leasehold improvements
3,625
(2,222)
1,403
53,980
(32,620)
21,360
1,211
-
1,211
55,191
$ (32,620)
Deloitte & Touche Audit Report
Buildings
16
$
Furniture and equipment
In-progress
$
$
14,186
22,571
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 5: Premises and Equipment, Continued…)
2007
Cost
Accumulated
Depreciation
Net
Book Value
28,268
$ (12,760)
$
20,186
(15,354)
4,832
Automobiles and mobile facilities
1,335
(503)
832
Leasehold improvements
3,514
(2,072)
1,442
53,303
(30,689)
22,614
884
-
884
54,187
$ (30,689)
Buildings
$
Furniture and equipment
In-progress
$
$
15,508
23,498
For the years ended December 31, 2008, 2007 and 2006, depreciation expense amounted to $3,064, $2,527 and $2,940, respectively.
Note 6 - Other Assets
A summary of other assets at December 31, 2008 and 2007 follows:
2008
Prepaid expenses
Deferred tax asset
Other receivables
Foreclosed assets, net
Credit card and merchant service settlement clearing
Mortgage servicing rights
Prepaid income tax
Other
2007
$
4,773
2,418
1,567
252
722
719
389
$
4,644
2,242
1,283
657
3,018
721
812
789
$
10,840
$
14,166
Foreclosed assets are presented net of an allowance for losses. A summary of the changes in foreclosed assets is as follows:
2008
Balance at beginning of year
$
657
2007
$
1,201
225
118
Sales
(676)
(498)
206
821
Writedowns/loss on sale, net
(45)
(215)
Change in valuation allowances
91
51
Balance at end of year
$
252
$
657
Deloitte & Touche Audit Report
Additions
17
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 6: Other Assets, Continued…)
A summary of foreclosed asset operations, which are included in non-interest expenses, for the years ended December 31,
2008, 2007 and 2006, is as follows:
2008
2007
2006
Real estate operations, net
$
71
$
23
$
70
Gain on the sale of the foreclosed assets
(22)
-
(10)
Writedowns
67
215
311
Change in valuation allowances
(91)
(51)
129
Net losses from other real estate operations
$
25
$
187
$
500
Note 7 - Deposits
A summary of deposits at December 31, 2008 and 2007 follows:
2008
Non-interest bearing deposits
Interest bearing deposits:
Demand deposits
Regular savings
Time deposits:
$100,000 or more
Less than $100,000
Other interest bearing deposits
Total
2007
$ 205,333
$ 193,742
67,292
215,367
68,246
213,440
128,230
23,221
100,220
534,330
157,943
26,006
76,787
542,422
$ 739,663
$ 736,164
At December 31, 2008, the scheduled maturities of time deposits are as follows:
Deloitte & Touche Audit Report
Year ending December 31,
18
2009
2010
2011
2012
2013
Thereafter
$ 146,546
2,630
1,090
401
437
347
$ 151,451
Note 8 - Borrowings
Federal Home Loan Bank (FHLB) Advances
The Bank has a credit line with the FHLB equal to 10% of total assets. At December 31, 2008 and 2007, the Bank had outstanding advances against this credit line under Blanket Agreements for Advances and Security Agreements (the Agreements) of
$35,000 and $10,000, respectively. The Agreements enable the Bank to borrow funds from the FHLB to fund mortgage loan
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 8: Borrowings, Continued…)
programs and to satisfy certain other funding needs. The weighted average rate of interest applicable to the advance was 3.60%
and 5.32% at December 31, 2008 and 2007, respectively. The advances outstanding at December 31, 2008 are due to mature
as follows:
September 2009
$ 10,000
October 2009
5,000
January 2010
5,000
March 2011
5,000
March 2013
10,000
$
35,000
The value of first lien one-to-four unit mortgage loans and first lien multifamily loans pledged under the Agreements must be
maintained at not less than 120% and 125%, respectively, of the advances outstanding.
Overnight Fed Fund Lines
At December 31, 2008 and 2007, the Bank had $29,000 in federal funds lines of credit available with its correspondent banks.
At December 31, 2008 and 2007, there were no outstanding borrowings against any of these lines.
Note 9 - Income Taxes
The income tax provision includes the following components:
Government of Guam income taxes:
Current
Deferred
Foreign income taxes (including U.S. income taxes)
Total income tax expense
2008
2007
2006
$
2,419
(324)
314
$
3,300
322
$
4,020
(377)
420
$
2,409
$
3,622
$
4,063
The components of deferred income taxes are as follows:
2008
2007
2006
$
(33)
(2)
(321)
(31)
63
$
(19)
60
(37)
(35)
31
$
46
(59)
(71)
(80)
(36)
(177)
Deferred tax (benefit) provision
$
(324)
$
-
$
(377)
The components of the net deferred tax asset are as follows:
Deferred tax assets:
Allowance for loan losses
Foreclosed assets
Net unrealized (gain) loss on securities available for sale
Net unrealized loss on securities held to maturity
Loan origination fees
Deferred rent obligation
Total deferred tax asset
2008
$
3,381
82
(308)
421
411
137
4,124
2007
$
3,060
145
(208)
469
378
106
3,950
2006
$
3,023
176
240
524
359
71
4,393
Deloitte & Touche Audit Report
Deferred loan origination fees
Mortgage servicing rights
Depreciation, accelerated for tax purposes
Loan loss provision
Deferred rent obligation
Foreclosed assets valuation
19
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 9: Income Taxes, Continued…)
2008
Deferred tax liability:
Depreciation
Mortgage servicing rights
Total deferred tax liability
Net deferred tax asset
$
2007
2006
(1,462)
(244)
(1,462)
(246)
(1,462)
(186)
(1,706)
(1,708)
(1,648)
2,418
$
2,242
$
2,745
No valuation allowance has been provided to reduce the deferred tax asset because, in management’s opinion, it is more likely
than not that the entire amount will be realized.
The difference between effective income tax expense and income tax expense computed at the Guam statutory rate was due to
nontaxable interest income earned on loans to the Government of Guam for each of the years ended December 31, 2008, 2007
and 2006.
Deloitte & Touche Audit Report
Note 10 - Employee Benefit Plans
20
Stock Purchase Plan
The Bank has a stock purchase plan that covers substantially
all employees meeting the minimum service requirements.
Under the plan, qualified employees are allowed to participate in the purchase of designated shares of the Bank’s common stock at 85% of fair market value at date of exercise. A
maximum of 1,947 shares are authorized for issuance. As
of December 31, 2008, 1,657 rights to purchase shares have
been granted to employees. Rights to purchase shares are
exercisable for a ten-year period from the date of grant. For
the years ended December 31, 2008, 2007 and 2006, shares
totaling 33, 35 and 18, respectively, were issued under the
plan at average prices per share of $7.57, $7.40 and $6.68,
respectively.
up to $100 each in Phantom Stock units in lieu of an equal
amount of incentive bonus as computed in their employment
agreements. These nonvoting Phantom Stock units may be
held for receipt of dividends equal to the dividend rate of the
Bank’s common stock or may be redeemed at a price equal
to the market value of the Bank’s common stock. In addition, for each Phantom Stock unit received, the executive
employee receives options to purchase three shares of the
Bank’s common stock at a price equal to the market value of
the stock at the date the options are granted. The redemption
of the Phantom Stock or the exercise of the options will result
in the forfeiture by the executive employee of any rights
under the other. At December 31, 2008 and 2007, there were
no Phantom Stock units outstanding under the plan.
Executive Employment Agreements
The President and the Executive Vice President are employed
under separate agreements terminating December 31, 2012
and May 31, 2008. The Executive Vice President’s agreement
was subsequently renewed in February 2009, retroactive to
June 1, 2008. Under the agreements, they receive specified
base salaries, which are adjusted annually for changes in
the U.S. Consumer Price Index plus an incentive bonus. The
President’s and the Executive Vice President’s bonuses are
based on profitability, also within the defined limit, subject to
adjustments based on the Bank meeting certain performance
criteria.
Senior Vice Presidents Employment
Agreements
Seven Senior Vice Presidents entered into separate 5-year
employment agreements terminating on December 31, 2012.
Under the agreements, they receive specified base salaries
and they may receive bonuses, within a defined limit, based
on the Bank’s profitability, adjusted by certain Bank performance criteria.
Under an agreement with the Bank, the designated survivor
of the late Chairman is receiving a bonus based on the level
of qualified assets or profitability, within a defined limit,
through 2010.
Under a Phantom Stock unit and stock option plan, the
President and Executive Vice President may elect to receive
Employee Retirement Savings Plan
The Bank has a 401(k) Plan whereby substantially all employees, with at least one year of continuous service, are eligible
to participate in the Plan. The Bank made matching contributions equal to 50 percent of the first six percent of an
employee’s compensation contributed to the Plan through
February 28, 2008. Effective March 1, 2008, the Bank makes
matching contributions equal to 100% of an employee’s
deferrals, up to 1% of the employee’s compensation, plus
50% of the employee’s deferrals that exceed 1%, but less than
5% of the employee’s compensation. Previously, matching
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 10: Employee Benefit Plans, Continued…)
contributions vest to the employee over a five-year period
of service. Effective March 1, 2008, matching contributions
become 100% vested to the employee after 2 years of service.
For the years ended December 31, 2008, 2007 and 2006,
expense attributable to the Plan amounted to $322, $242 and
$176, respectively.
Note 11 - Lease Commitments
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 terms of the leases in accordance with SFAS No. 13. The Bank has recorded a deferred obligation of $403 and
$312 as of December 31, 2008 and 2007, respectively, which has been included under other liabilities, to reflect the excess of
rent expense over cash paid on the leases.
At December 31, 2008, annual lease commitments under the above noncancelable operating leases were as follows:
Year ending December 31,
2009
2010
2011
2012
2013
Thereafter
$
1,795
1,410
1,132
628
155
21,392
$
26,512
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 years ended December 31, 2008, 2007 and 2006 were approximately $252,
$285 and $235, respectively.
Additionally, the Bank leases office space to third parties, with original lease terms ranging from 3 to 5 years with option
periods ranging up to 15 years. At December 31, 2008, minimum future rents to be received under noncancelable operating
sublease agreements were as follows:
Year ending December 31,
2009
2010
2011
151
55
9
$
215
A summary of the rental activities for the years ended December 31, 2008, 2007 and 2006, is as follows:
2008
Rent expense
$
Less: sublease rentals
2,285
2007
$
249
$
2,036
2,264
2006
$
299
$
1,965
2,176
241
$
1,935
Deloitte & Touche Audit Report
$
21
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
Note 12 - Fair Value of Financial Assets and Liabilities
SFAS No. 157 defines fair value as 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. SFAS No. 157 establishes a fair value
hierarchy that prioritizes the use of inputs used in valuation
methodologies into the following three levels:
LEVEL 1: Quoted prices in active markets for identical
assets or liabilities. Level 1 assets and liabilities include debt
and equity securities and derivative contracts 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.
Deloitte & Touche Audit Report
LEVEL 2: Observable inputs other than Level 1 prices,
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
2 assets and liabilities include debt securities with quoted
prices that are traded less frequently than exchange-traded
instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable
in the market and can be derived principally from or corroborated by observable market data. This category generally
include U.S. Government and agency mortgage-backed debt
securities, corporate debt securities, derivative contracts,
residential mortgage and loans held-for-sale.
22
LEVEL 3: Unobservable inputs that are supported by little
or no market activity and that are significant to the fair value
of the assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar
technique, as well as instruments for which the determination of fair value requires significant management judgment
and estimation. This category generally includes certain
private equity instruments, residential MSRs, asset-backed
securities (ABS), highly structured or long-term derivative
contracts and certain collateralized debt obligations (CDO)
where independent pricing information was not able to be
obtained for a significant portion of the underlying assets.
In determining the appropriate levels, the Bank performs a
detailed analysis of the assets and liabilities that are subject
to SFAS No. 157. When available, quoted market prices are
used to determine fair value. If quoted market prices are
not available, fair value is based upon valuation techniques
that use, where applicable, current market-based or independently sourced parameters, such as interest rates, yield
curves, prepayment rates. Valuation adjustments may be
made to ensure the financial instruments are recorded at fair
value. A description of the valuation methodologies used for
certain financial assets and financial liabilities measured at
fair value is as follows:
Available-for-Sale Securities
Securities available for sale are recorded at fair value based
on quoted market prices, if available. If quoted market prices
are not available, management utilizes third-party pricing
services or broker quotations from dealers in the specific
instruments. Level 1 securities include those traded on an
active exchange, as well as U.S. government and its agencies securities. Level 2 securities include mortgage-backed
securities, certain asset-backed securities and U.S. municipal
bonds. The Bank does not have any Level 3 securities.
Loans Held for Sale
Residential mortgage loans held for sale are recorded at the
lower of cost or fair value. The fair value of fixed rate residential loans is based on whole loan forward prices obtained
from government sponsored enterprises (mainly, Federal
Home Loan Mortgage Corporation). These loans are classified as Level 2.
Loans Impaired Under SFAS No. 114
Impaired loans are evaluated and valued at the time the loan
is identified as impaired, at the lower of cost or fair value.
As a practical expedient, fair value may be measured based
on a loan’s observable market price or the underlying collateral securing the loan. Collateral may be real estate or
business assets including equipment. The value of collateral
is determined based on independent appraisals. Appraised
values may be adjusted based on management’s historical
knowledge, changes in market conditions from the time of
valuation, and management’s knowledge of the borrower
and borrower’s business. Impaired loans are reviewed and
evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. Loans impaired under SFAS
No. 114 that are valued based on underlying collateral are
classified as Level 3.
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. For more information on Level 3 MSRs, see
Note 1 to the consolidated financial statements.
Financial Instruments Not Measured at
Fair Value
The Bank also has financial instruments that are not measured at fair value on a recurring or nonrecurring basis and
therefore do not have disclosure requirements under SFAS
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 12: Fair Value of Financial Assets and Liabilities, Continued…)
No. 157. For more information on these financial instruments, see Note 13 to the consolidated financial statements.
Assets measured at fair value on a recurring basis as of December 31, 2008 are as follows:
Investment securities
Available for Sale
Other assets:
MSRs
Total assets
Quoted Prices
in Active
Markets for
Indentical
Assets
Significant
Other
Observable
Inputs
Significant
Observable
Inputs
(Level 1)
(Level 2)
(Level 3)
$
2,250
$ 158,479
$
-
$
-
$
-
$
719
$
$
2,250
$ 158,479
$
719
$ 161,448
Total
$ 160,729
719
There are no liabilities measured at fair value on a recurring basis as of December 31, 2008.
During the year ended December 31, 2008, the changes in Level 3 assets measured at fair value on a recurring basis are as
follows:
Balance as January 1, 2008
Realized and unrealized net gains (losses):
Included in net income
Included in other comprehensive income
Purchases, sales and issuance, net
$
721
Balance as of December 31, 2008
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of December 31, 2008
$
719
$
-
(2)
-
There were no transfers in or out of the Bank’s Level 3 financial assets for the year ended December 31, 2008.
The Bank also measures certain financial assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. For the
year ended December 31, 2008, there were no adjustments to fair value for the Bank’s loans held for sale in accordance with
U.S. GAAP.
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, requires the disclosure of the estimated fair
value of financial instruments including those financial
instruments for which the Bank did not elect the fair value
option. The fair values of such instruments have been
derived, in part, by management’s assumptions, the estimated amount and timing of future cash flows and estimated
discount rates. Different assumptions could significant affect
these estimated fair values. Accordingly, the net realizable
could be materially different from the estimates presented
below. In addition, the estimates are only indicative of the
value of individual financial instruments and should not be
considered an indication of the fair value of the Bank.
The provisions of SFAS No. 107 do not require the disclosure of the fair value of lease financing arrangements and
nonfinancial instruments, including goodwill and intangible
assets.
The following disclosures represent financial instruments
in which the ending balance at December 31, 2008 and
2007 is not carried at fair value in its entirety on the Bank’s
Consolidated Statement of Condition.
Cash and Cash Equivalents
The carrying amount of cash and short-term instruments
approximates fair value.
Deloitte & Touche Audit Report
Note 13 - Fair Value of Financial Instruments (SFAS No. 107)
23
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 13: Fair Value of Financial Instruments (SFAS No. 107),
Continued…)
Interest Bearing Deposits with Banks
The carrying amount of interest bearing deposits with banks
approximates fair value.
Investment Securities Held-to-Maturity
Fair values of investment securities are based on quoted
market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices
of comparable securities.
Federal Home Loan Bank stock
The carrying value of Federal Home Loan Bank stock approximates fair value.
Loans
For variable-rate loans that re-price 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. The carrying amount of accrued inte-
rest approximates fair value.
Deposits
The fair values disclosed for demand deposits (e.g., 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 (i.e.,
their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Accrued Interest
The carrying amount of accrued interest approximates fair
value.
Federal Home Loan Bank Advances
The fair value of these advances approximates their carrying
amounts as the rate of interest re-prices according to the
FHLB quoted rates of borrowing for advances with similar
terms.
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.
The estimated fair values of the Bank’s financial instruments are as follows:
2008
Carrying
Amount
Deloitte & Touche Audit Report
Financial assets:
Cash and cash equivalents
24
2007
Fair
Value
Carrying
Amount
Fair
Value
$
88,091
$
88,091
$
41,385
$
41,385
Interest bearing deposit with banks
$
5,154
$
5,154
$
10,154
$
10,154
Investment securities held to maturity
$
48,610
$
48,618
$
60,374
$
59,398
Federal Home Loan Bank stock
$
2,198
$
2,198
$
2,198
$
2,198
Loans, net of allowance
$ 515,168
$ 517,250
$ 445,842
$ 447,022
Accrued interest receivable
$
$
$
$
Financial liabilities:
Deposits
4,133
4,133
4,440
4,440
$ 739,663
$ 739,221
$ 736,164
$ 738,646
Accrued interest payable
$
972
$
972
$
1,949
$
1,949
Federal Home Loan Bank advances
$
35,000
$
35,000
$
10,000
$
10,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[In thousands, except per share data]
December 31, 2008, 2007 and 2006
Note 14 - 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.
to average assets (as defined). Management believes, as of
December 31, 2008 and 2007, that the Bank met all capital
adequacy requirements to which they are subject.
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 riskweighted assets (as defined) and of Tier 1 capital (as defined)
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 December 31,
2008 and 2007 are also presented in the table.
As of December 31, 2008:
Total capital
(to Risk Weighted Assets)
Tier 1 capital
(to Risk Weighted Assets)
Tier 1 capital
(to Average Assets)
Actual
Amount
Ratio
For Capital Adequacy
Purposes
Amount
Ratio
To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$ 86,206
15.66%
$ 44,028
8.00%
$ 55,035
10.00%
$ 79,326
14.41%
$ 22,014
4.00%
$ 23,021
6.00%
$ 79,326
9.25%
$ 34,320
4.00%
$ 42,901
5.00%
$ 83,073
17.57%
$ 37,834
8.00%
$ 47,293
10.00%
$ 77,161
16.32%
$ 18,917
4.00%
$ 28,376
6.00%
$ 77,161
9.26%
$ 33,318
4.00%
$ 41,648
5.00%
Note 15 - 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 com-
Deloitte & Touche Audit Report
As of December 31, 2007:
Total capital
(to Risk Weighted Assets)
Tier 1 capital
(to Risk Weighted Assets)
Tier 1 capital
(to Average Assets)
As of December 31, 2008, 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 riskbased, Tier 1 risk-based and Tier 1 leverage ratios as set forth
in the following tables.
25
[In thousands, except per share data]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Note 15: Off-Balance Sheet Activities, Continued…)
mitments and letters of credit, is represented by the contractual amount of these instruments. The Bank follows the same credit
policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of financial instruments with off-balance-sheet risk at December 31, 2008 and 2007 is as follows:
2008
Commitments to extend credit
Letters of credit:
Standby letters of credit
Other letters of credit
2007
$
98,645
$ 128,266
$
16,384
1,167
17,551
$
$
$
22,675
2,526
25,201
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. Management does not anticipate any material losses as a result of these transactions.
Note 16 - Guarantees
Deloitte & Touche Audit Report
For the purpose of FASB Interpretation No. 45 (“FIN 45”)
a guarantee is a contract in which the guarantor would be
required to pay the guaranteed party based on changes in
underlying asset, liability, or equity security of the guaranteed party based on a third party’s failure to perform under
an obligating guarantee (performance guarantee). The Bank
has determined that its standby letters-of-credit and financial
guarantees are guarantees within the meaning of FIN 45.
26
Standby letters-of-credit and financial guarantees are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party in borrowing
arrangements.
At December 31, 2008, the maximum undiscounted future
payments that the Bank could be required to make was
$16,384. All of these arrangements mature within one year.
The Bank generally has recourse to recover from the customer any amounts paid under these guarantees. Most of
the guarantees are fully collateralized, however, several are
unsecured. The Bank had not recorded any liabilities associated with these guarantees at December 31, 2008.
Note 17 - Contingency
The Bank is involved in certain legal actions and claims that arise in the ordinary course of business. Management believes
that, as a result of its legal defenses and insurance arrangements, none of these matters have a material adverse effect on the
Bank’s financial position, results of operations or cash flows.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
27
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTIN U ED )
[$ in tables in thousands]
Results of Operations
At December 31, 2008, the Bank’s total assets increased by 3.5% to close the year at $858.3 million, up $29.0 million from
$829.3 million in 2007, attributed to the $69.3 million increase in net Loans, and $46.7 million increase in Cash and Cash
Equivalents.
Assets
2008
2007
$ Change % Change
Cash and Due from Banks
Federal Funds Sold
Interest Bearing Deposits with Banks
Total Cash and Cash Equivalents
$ 28,070
55,000
5,021
88,091
$ 22,937
18,400
48
41,385
$
5,133
36,600
4,973
46,706
22.4%
198.9%
10360.4%
112.9%
Interest Bearing Deposits with Banks
Investment Securities Available-For-Sale
Investment Securities Held-To-Maturity
Federal Home Loan Bank Stock, at Cost
Loans, Net of Allowance for Loan Losses
Accrued Interest Receivable
Premises and Equipment, net
Goodwill
Other Assets
Total Assets
5,154
160,729
48,610
2,198
515,168
4,133
22,571
783
10,840
$ 858,277
10,154
226,442
60,374
2,198
445,842
4,440
23,498
783
14,166
$ 829,282
(5,000)
(65,713)
(11,764)
–
69,326
(307)
(927)
–
(3,326)
$ 28,995
(49.2%)
(29.0%)
(19.5%)
–
15.5%
(6.9%)
(3.9%)
–
(23.5%)
3.5%
The economic crises in the U.S., and in particular the severe crises that has plagued the financial markets caused both shortterm and long-term interest rates to decline to historic lows, with the federal funds target rate closing the year at a range of
0.00% to 0.25%. Consequently, despite the $29.5 million growth in our earning assets portfolio which was largely attributed
to the sustained growth in our commercial and government loans, the substantial decline in rates compressed our interest
margins as we correspondingly lowered the interest rates on our floating rate commercial and adjustable rate mortgage loans.
While we also gradually lowered the interest rates on our interest bearing liabilities and thus reduced our total interest expense
by $2.6 million to $9.8 million, down from $12.4 million, the decline in rates caused our total interest income to decline by $4.2
million (or -7.8%) to $50.0 million, down from $54.3 million last year. As a result, our net interest income before provision for
loan losses for the year totaled $40.2 million, down $1.7 million (or -4.0%) from $41.8 million in 2007.
While money center and large regional banks throughout the U.S. recorded substantial losses during the year, our Bank’s core
business continued to deliver sustained profit performance, closing the year with Net Profits After Taxes of $6.2 million. This
contributed $2.4 million (net of the $4.3 million in dividends paid) to our Common Shareholders Equity, which closed the year
at $81.0 million, up 3.1% from $78.6 million in 2007.
Income
Total Interest Income
Total Interest Expense
Net Interest Income
Provision for Loan Losses
Net Interest Income after Provision
Total Non-Interest Income
Total Non-Interest Expense
Income Before Income Taxes
Income Tax Expense
Net Income
28
2008
2007
$ Change
% Change
$ 50,021
9,843
40,178
2,400
37,778
10,718
39,878
8,618
2,409
$ 6,209
$ 54,269
12,422
41,847
929
40,918
9,986
38,794
12,110
3,622
$ 8,488
$ (4,248)
(2,579)
(1,669)
1,471
(3,140)
732
1,084
(3,492)
(1,213)
$ (2,279)
(7.8%)
(20.8%)
(4.0%)
158.3%
(7.7%)
7.3%
2.8%
(28.8%)
(33.5%)
(26.8%)
Loans and Deposits
During 2008, the Bank continued to aggressively market its loan programs throughout the islands, as well as increase its loan
participation with various U.S. West Coast Banks (primarily in California) to diversify its credit risk. At year-end 2008, total
(gross) loans stood at $526.3 million, up $70.4 million (or 15.4%) from $456.0 million in 2007. Commercial loans, inclusive of
loan participations, registered the largest increase, up $40.3 million (or 13.7%) to close the year at $333.4 million from $293.1
million, followed by Government loans, which increased to $26.0 million (up 169.0%) from $9.7 million. Real Estate loans and
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUED )
[$ in tables in thousands]
Consumer loans likewise registered moderate increases during the year, with Real Estate loans closing the year at $79.4 million, up from $71.6 million, and Consumer and Credit Card loans at $84.6 million, up from $78.7 million last year. Our Ready
Reserve Line of Credit portfolio (other loans), on the other hand, decreased slightly to $2.9 million, down from $3.0 million.
Loans
Commercial
Consumer
Real Estate
Government
Other
Gross Loans
Less: Net Deferred Loan Fees
Less: Allowance for Loan Losses
Net Loans
2008
2007
$ Change
% Change
$ 333,365
84,629
79,367
26,036
2,924
526,321
1,210
9,943
$ 515,168
$ 293,083
78,657
71,560
9,679
2,973
455,952
1,110
9,000
$ 445,842
$ 40,282
5,972
7,807
16,357
(49)
70,369
100
943
$ 69,326
13.7%
7.6%
10.9%
169.0%
(1.6%)
15.4%
9.0%
10.5%
15.5%
While the Bank continued its focus on improving asset quality through its stringent underwriting standards and effective collection efforts, the Bank’s average volume of loans categorized as impaired increased to $7.6 million, up $0.8 million from $6.8
million last year. Gross loan losses in 2008 increased to $2.7 million, up from $2.1 million, while recoveries of loans previously
charged-off dropped slightly to $1.2 million from $1.3 million last year. As a result, net loans losses for the year increased by
$0.6 million to $1.5 million, up from $0.8 million last year.
Impaired Loans
Average investment in Impaired Loans
Interest income recognized on Impaired Loans
2008
$
$
Loan Losses
Gross Loan Losses
Recoveries of charged-off loans
Net Loan Losses
7,600
226
2007
$
$
2008
$
$
2,681
1,224
1,457
6,779
61
2007
$
$
2,094
1,274
820
$ Change
$
$
821
165
$ Change
$
$
587
(50)
637
% Change
12.1%
270.5%
% Change
28.0%
(3.9%)
77.7%
On the liabilities side, the Bank’s deposit base registered nominal growth in 2008, closing the year at $739.7 million, up $3.5
million (or 0.5%) from $736.2 million in 2007. Other interest bearing deposits, which is comprised primarily of Time Deposits
Open Account (TDOA), the lead product in terms of absolute dollar amount increase, reached $100.2 million, up $23.4 million
(or 30.5%) from $76.8 million last year. Demand Deposits, interest bearing and non-interest bearing combined, totaled $272.6
million, up $10.6 million (or 4.1%) from $262.0 million, while Regular Saving Deposits increased nominally by $1.9 million
to close the year at $215.4 million, up from $213.4 million last year. Time Deposits, which is comprised largely of jumbo time
deposits with balances of $100 thousand or more, dropped substantially, closing the year at $151.5 million, down $32.5 million
(or –17.7%) from $183.9 million last year.
Overall, the sustained growth in both our loan and deposit portfolios during the year increased our loan-to-deposit ratio to
71.1%, up 9.2% from 61.9% in 2007.
Deposits
Non-Interest Bearing Deposits
Interest Bearing Deposits:
Demand Deposits
Regular Savings
Time Deposits:
$100,000 or more
Less than $100,000
Other Interest Bearing Deposits
Total Interest Bearing Deposits
Total Deposits
2008
2007
$ Change
$ 205,333
$ 193,742
$ 11,591
6.0%
67,292
215,367
68,246
213,440
(954)
1,927
(1.4%)
0.9%
128,230
23,221
100,220
157,943
26,006
76,787
(29,713)
(2,785)
23,433
(18.8%)
(10.7%)
30.5%
534,330
542,422
(8,092)
(1.5%)
$ 739,663
$ 736,164
3,499
0.5%
$
% Change
29
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTIN U ED )
[$ in tables in thousands]
Liquidity and Investment Portfolio
During 2008, the Bank’s investment portfolio, which is comprised of U.S. government agency and treasury securities, bank
qualified tax-exempt municipal bonds, federal funds sold, and time deposits at other banks decreased by $40.9 million to close
the year at $274.5 million, down 13.0% from $315.4 million in 2007. This decrease was primarily attributed to the $77.5 million
(or -27.0%) net decrease in our investment securities portfolio, which totaled $209.3 million, down from $286.8 million as we
liquidated available-for-sale securities to fund our loan growth. This decrease, however, was partially offset by the $36.6 million increase in overnight federal funds sold, which totaled $55.0 million at year-end, up from $18.4 million last year.
As the crises in the U.S. financial markets worsened along with short-term interest rates trending downward during the year,
the Bank took proactive steps to minimize the potential adverse impact on the credit quality of its investment portfolio, as
well as its investment portfolio income, by restructuring and reinvesting a portion of its municipal bonds and short-term
U.S. government agency securities into longer term U.S. government agency securities backed by the full faith and credit the
United States. Notwithstanding the net decline in our investment portfolio resulting from the liquidation of securities to fund
our loan growth, our restructuring and reinvestment action generated $1.4 million in net gains from securities sold, and helped
minimize the overall decline in our investment interest revenues, which totaled $12.6 million for the in 2008, down $2.1 million
(or 14.2%) from $14.7 million last year. Our investment portfolio yield for the year, however, dropped to 3.75%, down from
4.64% in 2007.
Investments
Federal Funds Sold
TCDs at Other Banks
Investment Securities-AFS
Investment Securities-HTM
Total Investment Portfolio
2008
2007
$ Change
% Change
$ 55,000
10,154
160,729
48,610
$ 274,493
$ 18,400
10,202
226,442
60,374
$ 315,418
$ 36,600
(48)
(65,713)
(11,764)
$ (40,925)
198.9%
(0.5%)
(29.0%)
(19.5%)
(13.0%)
As required by accounting standards, the Bank accounts for and classifies its investment securities as “Available-for-Sale,”
“Held-to-Maturity” and “Trading” based on management’s intention regarding their retention. However, in following through
with its intention to hold its investments to maturity, and at the same time providing for its short-term liquidity requirements,
the Bank maintains $48.6 million of its investments in U.S. Government Agencies, sponsored agencies debt securities, and
mortgage-back securities as “Held-to-Maturity”. The Bank intends to and has the ability to hold these securities to their contractual maturity. This leaves $160.7 million in securities “Available-for-Sale” at fair market value. The Bank does not engage
in trading of securities, and therefore does not hold any of its securities in the “Trading” classification.
At December 31, 2008, the amortized cost and fair value of investment securities, with gross unrealized gains and losses,
follows:
Gross
Gross
Amortized Unrealized Unrealized
Fair
Investment Securities
Cost
Gains
Losses
Value
Securities available for sale:
U.S. Treasury obligations
$ 2,245
$
5
$
$ 2,250
U.S. Municipal bonds
22,509
43
(635)
21,917
U.S. Government agencies and sponsored
agencies Mortgage-Backed Securities
135,070
1,922
(430)
136,562
Totals
Securities held to maturity:
U.S. Government agencies and sponsored
agencies Mortgage-Backed Securities
30
$ 159,824
$
1,970
$ 48,610
$
250
$ (1,065)
$ 160,729
$
$ 48,618
(242)
Net Interest Income
The combined effect of the decline in interest revenues in our loan and investment portfolios, coupled with the $1.5 million
increase in Provision for Loan Losses reduced our Net Interest Income by $3.1 million to close the year at $37.8 million, down
7.7% from $40.9 million in 2007. This was largely attributed to the decrease in total interest income, which totaled $50.0
million for the year, down $4.2 million (-7.8%) from $54.2 million last year. Interest and fees on loans, which registered the
largest decrease, totaled $37.4 million for the year, down $2.2 million from $39.6 million, followed by interest on investment
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUED )
[$ in tables in thousands]
securities, which totaled $11.6 million, down $1.1 million from $12.7 million last year. Interest on federal funds sold likewise
dropped by $1.0 million to close the year at $0.6 million, down from $1.6 million last year.
On the other side of the equation, our total interest expense in 2008 decreased by $2.6 million (or 20.8%) to $9.8 million,
down from $12.4 million in 2007. This is primarily attributed to the $3.2 million decrease in interest paid on time and savings
deposits, but was partially offset by the $0.7 million increase in interest paid on other borrowed funds. Time Deposits, which
dropped by $32.5 million during the year, accounted for the largest decrease in interest expense, totaling $4.6 million, down
$2.4 million from $7.0 million last year. In addition, interest expense on Savings deposits, interest bearing demand deposits,
and other interest bearing deposits combined, totaled $4.0 million for the year, down $0.8 million from $4.8 million last year.
Interest Income
Interest income:
Loans
Investment Securities
Federal Funds Sold
Deposits with Other Banks
Total Interest Income
Interest Expense:
Time Deposits
Savings Deposits
Other Borrowed Funds
Total Interest Expense
Net Interest Income
Before Provision for Loan Losses
Provision for Loan Losses
Net Interest Income after
Provision for Loan Losses
2008
2007
$ Change
% Change
$ 37,413
11,568
636
404
$ 50,021
$ 39,571
12,671
1,602
425
$ 54,269
$ (2,158)
(1,103)
(966)
(21)
$ (4,248)
(5.5%)
(8.7%)
(60.3%)
(4.9%)
(7.8%)
$
$
7,055
4,843
524
12,422
$ (2,415)
(821)
657
(2,579)
(34.2%)
(17.0%)
125.4%
(20.8%)
$ 40,178
$ 2,400
$ 41,847
$
929
$ (1,669)
$ 1,471
(4.0%)
158.3%
$ 37,778
$ 40,918
$ (3,140)
(7.7%)
4,640
4,022
1,181
9,843
Overall, the Bank’s net interest margin for 2008 dropped to 4.88%, down from 5.57% in 2007.
Non-Interest Income and Non-Interest Expense
Non-interest income, which is derived from service charges, fees, commissions and other non-interest income sources totaled
$10.7 million in 2008, up $0.7 million (or 7.3%) from $10.0 million in 2007. This increase is primarily attributed to a net gain
of $1.4 million realized from the sale of investment securities to fund our loan growth, and the $0.2 million increase in credit
card and merchant servicing income, which totaled $2.9 million, up from $2.7 million last year. These increases were, however,
partially offset by the $0.8 million decrease in fees, service charges and other miscellaneous income (excluding credit card and
merchant servicing income), which totaled $6.4 million for the year, down from $7.2 million last year. This decrease was largely
attributed to the $0.7 million drop in miscellaneous income from $0.9 million in 2007 to $0.2 million this year, and the $0.2
million decrease in mortgage servicing income, which totaled $0.5 million, from $0.7 million last year.
On the expense side, non-interest expenses in 2008 totaled $39.9 million, up $1.1 million (or 2.8%) from $38.8 million in 2007.
This increase was largely attributed to the increase in salaries and benefit expenses, which totaled $18.0 million, up $0.6 million (or 3.6%) from $17.4 million, coupled with the $0.8 million increase in occupancy and furniture and equipment expenses,
which totaled $10.6 million, up from $9.8 million last year. The increase in salaries and benefit expenses during the year was
attributed to the combined effect of increasing our staffing levels, primarily at our branches to facilitate extending our branch
banking hours, as well as increasing the base salaries of our employees to market levels, and also implementing additional
benefits programs to further solidify our employee retention and recruitment by providing a more competitive compensation
package. The increase in occupancy and furniture and equipment expenses was largely attributed to the $0.5 million increase in
building maintenance and repair expenses of our branch facilities, $0.4 million increase in furniture and equipment depreciation expenses, and $0.2 million increase in power and water utilities costs, primarily in Guam and the CNMI.
General, administrative and other operating expenses, which totaled $11.2 million during 2008, decreased by $0.4 million (or
–3.4%) from $11.6 million last year primarily attributed to the $1.1 million decrease in operating losses, which this year registered a net recovery of $0.2 million versus $0.9 million in operating losses in 2007. In addition, our legal expenses during the
year decreased by $0.2 million to $0.4 million, down from $0.6 million last year. These decreases, however, were partially offset
31
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTIN U ED )
[$ in tables in thousands]
by the increase in current year operating losses, which totaled $1.3 million, up $0.5 million from $0.8 million, the $0.2 million
increase in special professional and contract services expenses, which totaled $1.4 million, up from $1.2 million, and the $0.1
million increase in telecommunications and data line expenses, which totaled $1.3 million, up from $1.2 million last year.
Capital Resources
Under current FDIC regulations, the Bank must maintain a 5.0% tier-1 capital to average assets ratio and a tier-1 capital to
risk-weighted assets ratio of 6.0% in order to be classified as “well capitalized”. Additionally, the Bank’s total capital to riskweighted assets ratio must equal or exceed 10.0% to meet the standard for that classification. At December 31, 2008, the Bank’s
total capital, net of the $0.3 million in treasury stocks, stood at $86.2 million, up $3.4 million from $83.1 million in 2007, and
the Bank’s capital ratios at December 31, 2008, continue to exceed all of the minimum regulatory capital adequacy requirements, and allow the Bank to remain classified as “well capitalized” for regulatory purposes.
Capital Adequacy
Minimum
to be
Adequately
Capitalized
2008
Total Capital
to Risk Weighted Assets
Tier 1 Capital
to Risk Weighted Assets
Tier 1 Capital
to Average Assets
Minimum
to be
Well
Capitalized
%
$ 86,206
15.66%
$ 79,326
14.41%
$ 79,326
9.25%
%
8.00%
10.00%
4.00%
6.00%
4.00%
5.00%
Off-Balance Sheet Arrangements
In the ordinary course of business, the Bank enters into agreements to extend credit to its customers, comprised of commitments to extend credit (loan commitments) and letters of credit. These arrangements are subject to the same credit criteria
as the on-balance sheet loans of the Bank and expose the Bank to a potential risk of credit loss represented by the contractual
amounts of the agreements. However, because some of these agreements may expire without being exercised, the Bank’s need
for cash to fund these may be less than the full amounts arranged. At December 31, 2008, Commitments to extend credit totaled
$98.6 million, down $29.6 million from $128.3 million in 2007. Likewise, total Letters of Credit outstanding decreased by $7.6
million to $17.6 million, down from $25.2 million in 2007. The Bank does not anticipate any material losses associated with
these off-balance arrangements.
Off-Balance Sheet Items
2008
2007
$ Change
% Change
Commitments to Extend Credit
Letters of Credit:
Standby Letters of Credit
Other Letters of Credit
$ 98,645
$ 128,266
$ (29,621)
(23.1%)
$ 16,384
1,167
$ 22,675
2,526
$ (6,291)
(1,359)
(27.7%)
(53.8%)
$ 17,551
$ 25,201
$ (7,650)
(30.4%)
Total Letters of Credit
Contractual Obligations
Payments due by period
Total
Long-term debt obligations
Capital lease obligations
Operating lease obligations
Purchase obligations
Other long-term liabilities
Total
32
$
26,512
$ 26,512
Less than
1 Year
$
1,795
$ 1,795
1 to 3
Years
$
2,542
$ 2,542
3 to 5
Years
$
$
783
783
More than
5 Years
$
21,392
$ 21,392
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
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUED )
[$ in tables in thousands]
method over the terms of the leases in accordance with SFAS No. 13. The Bank has recorded a deferred obligation of $0.4 million
and $0.3 million as of December 31, 2008 and 2007, respectively, which has been included under other liabilities, to reflect the
excess of rent expense over cash paid on the leases.
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 each of the years ended December 31, 2008 and 2007 were approximately $0.3
million.
Impact of Inflation and Changing Prices
The Bank’s financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America, which require the measurement of financial position and operating results in terms of historical dollars
without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation
can be found in the increased cost of the Bank’s operations. Nearly all of our assets and liabilities are financial, unlike most
industrial companies. As a result, the Bank’s performance is directly impacted by changes in interest rates, which are indirectly
influenced by inflation and inflationary expectations. Our ability to match the financial assets to the financial liabilities in our
asset/liability management tends to minimize the effect of a change of interest rates on our performance.
Forward-Looking Statements
When used in this filing and in future filings by the Bank with the Federal Deposit Insurance Corporation, in our press releases
or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer,
the words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but
not limited to changes in economic conditions in our market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in our market area and competition, all or any of which could cause actual results to differ
materially from historical earnings and from those presently anticipated or projected.
The Bank wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as
of the date made, and advises readers that various factors, including regional, national and international economic conditions,
substantial changes in the levels of market interest rates, credit and other risks of lending and investment activities, competition and regulatory factors, could affect our financial performance and could cause our actual results for future periods to differ
materially from those anticipated or projected.
The Bank does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such statements.
33
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINU ED )
[$ in thousands, except per share data, unaudited]
SUMMARY OF FINANCIAL CONDITION
Assets:
Cash and due from banks
Federal funds sold
Interest-bearing deposits with banks
Investment securities
Loans
Less allowance for possible loan losses
Net loans
Bank premises and equipment
Accrued interest receivable and other assets
Total assets
Liabilities and Stockholders’ Equity:
Deposits
Non-interest bearing
Interest bearing
Total deposits
Accrued interest payable and other liabilities
Federal Home Loan Bank advances
Long-term debt
Total liabilities
Stockholders’ Equity:
Capital stock of $0.2083 par value per share
Authorized 48,000,000 shares at 8,667,682 shares
issued/8,635,506 shares outstanding in 2008 and
8,633,966 shares issued/8,601,790 shares
outstanding in 2007
Capital surplus
Treasury stock
Retained earnings
Accumulated other comprehensive (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
34
2008
As of December 31,
2007
2006
2005
2004
$ 28,070
55,000
10,175
211,537
$ 22,937
18,400
10,202
289,014
$ 27,691
36,000
7,702
254,492
$ 30,991
17,400
7,201
294,468
$ 40,816
31,950
8,202
236,465
525,111
9,943
454,842
9,000
423,363
8,891
409,785
8,655
394,655
8,666
515,168
445,842
414,472
401,130
385,989
22,571
15,756
23,498
19,389
23,908
20,224
24,540
18,998
24,837
21,626
$858,277
$829,282
$784,489
$794,728
$749,885
$205,333
534,330
$193,742
542,422
$178,722
515,565
$194,262
514,817
$192,468
476,189
739,663
736,164
694,287
709,079
668,657
2,600
35,000
–
4,554
10,000
–
4,843
10,000
–
6,014
10,000
–
2,304
10,000
2,000
$777,263
$750,718
$709,130
$725,093
$682,961
1,813
13,097
(290)
66,616
(222)
1,801
12,839
(290)
64,719
(505)
1,792
12,595
–
62,453
(1,481)
2,079
14,154
(15,331)
70,603
(1,870)
2,076
14,073
(15,331)
67,757
(1,651)
81,014
78,564
75,359
69,635
66,924
$858,277
$829,282
$784,489
$794,728
$749,885
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUE D )
[$ in thousands, except per share data, unaudited]
SUMMARY OF OPERATIONS
Interest income:
Loans
Investment securities
Federal funds sold
Interest on deposits with banks
2008
Years ended December 31,
2007
2006
2005
2004
$ 37,413
11,568
636
404
$ 39,571
12,671
1,602
425
$ 37,666
11,112
1,352
363
$ 31,374
9,573
782
209
$ 28,052
7,734
269
87
50,021
54,269
50,493
41,938
36,142
4,640
4,022
1,181
7,055
4,843
524
5,747
3,985
460
3,406
2,384
458
1,534
2,049
481
9,843
12,422
10,192
6,248
4,064
Net interest income
40,178
41,847
40,301
35,690
32,078
Provision for loan losses
2,400
929
2,050
1,841
2,700
37,778
40,918
38,251
33,849
29,378
3,854
1,450
5,414
4,103
75
5,808
3,733
–
5,680
4,605
–
5,295
4,353
120
5,707
10,718
9,986
9,413
9,900
10,180
18,047
5,740
4,885
11,206
17,419
5,288
4,481
11,606
15,232
5,128
4,286
9,445
13,618
5,080
4,305
10,188
13,208
4,422
3,798
8,726
39,878
38,794
34,091
33,191
30,154
Income before income taxes
8,618
12,110
13,573
10,558
9,404
Income tax expense
2,409
3,622
4,063
3,425
2,899
Net income
$ 6,209
$ 8,488
$ 9,510
$ 7,133
$ 6,505
Earnings per share
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
Total interest income
Interest expense:
Time deposits
Savings deposits
Other borrowed funds
Total interest expense
Net interest income after provision for
loan losses
Non-interest income:
Service charges and fees
Investment securities gains, net
Other income
Total Non-interest income
Non-interest expenses:
Salaries and employee benefits
Net occupancy
Furniture and equipment
General, administrative and other expenses
Total Non-interest expenses
0.72
0.70
0.99
0.96
1.11
1.08
0.83
0.81
0.76
0.74
35
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINU ED )
[$ in thousands, unaudited]
SUMMARY OF AVERAGE BALANCES AND INTEREST RATES
Assets
Earning Assets
Due from Banks - Time
2008
Avg. Balance Avg. Rate
2007
Avg. Balance Avg. Rate
$
$
Securities
U.S. Government Securities
Other Securities
Total Securities
Federal Funds Sold
Loans
Commercial, Industrial & Government
Real Estate
Consumer
Total Loans
Total Earning Assets
Non-Earning Assets
Cash and Due from Banks - Demand
Bank Premises and Equipment
Other Real Estate Owned
Other Assets
Allowance for Loan Losses
Total Assets
3.52%
9,614
4.74%
243,289
49,508
292,797
4.26%
5.67%
4.50%
254,148
23,302
277,450
4.19%
6.73%
4.40%
31,582
1.80%
29,548
5.06%
329,696
74,792
82,725
6.93%
6.43%
9.93%
286,125
72,105
76,706
8.72%
6.81%
10.19%
487,213
7.37%
434,938
8.67%
823,389
6.08%
751,548
6.90%
30,870
23,520
361
13,586
(9,864)
26,628
23,801
752
22,054
(9,641)
$
881,862
$
$
293,086
278,416
0.85%
2.18%
571,502
31,615
-
Total Interest Paying Liabilities
603,117
Non-Interest Paying Liabilities and Equity
Demand Deposits
Other Liabilities
Stockholders’ Equity
196,032
4,650
78,063
Liabilities and Stockholders’ Equity
Interest Paying Liabilities - Deposits
Demand and Savings
Time Certificates
Total Time and Savings Deposits
Total Borrowed Funds
Subordinated Debt
Total Liabilities and Stockholders’ Equity
Rate Differential
36
11,797
$
$
815,142
$
287,978
249,989
1.11%
3.53%
1.50%
3.68%
0.00%
537,967
10,000
–
2.23%
5.25%
0.00%
1.61%
547,967
2.29%
186,248
5,602
75,325
881,862
$
4.46%
815,142
4.98%
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(CONTINUE D )
[$ in thousands, unaudited]
2006
Avg. Balance
Avg. Rate
Earning Assets:
$
8,499
4.49%
262,452
11,498
273,950
2005
Avg. Balance
Avg. Rate
$
7,379
3.22%
4.50%
6.24%
4.57%
279,634
47
279,681
26,313
4.92%
262,788
73,313
78,507
2004
Avg. Balance
Avg. Rate
$
6,853
1.81%
3.57%
4.77%
3.57%
244,077
19,590
263,667
3.38%
4.79%
3.49%
23,674
3.25%
20,998
1.47%
8.78%
6.43%
10.34%
233,568
78,163
84,352
7.08%
6.39%
10.25%
210,951
80,633
83,074
6.13%
6.32%
10.47%
414,608
8.66%
396,083
7.62%
374,658
7.13%
723,370
6.93%
706,817
5.82%
666,176
5.46%
Loans:
Assets:
22,829
24,109
1,391
20,350
(9,017)
27,740
24,849
4,770
20,127
(9,258)
$
783,032
$
302,976
216,965
0.96%
3.20%
519,941
10,000
–
529,941
31,017
25,843
8,617
19,179
(8,556)
$
775,045
$
742,276
$
300,294
198,625
0.62%
2.04%
$
299,074
184,867
0.56%
1.09%
1.90%
4.69%
0.00%
498,919
10,000
1,250
1.19%
4.12%
1.80%
483,941
10,000
3,231
0.76%
4.21%
1.80%
1.95%
510,169
1.25%
497,172
0.84%
Equity:
Deposits
& Equity
174,355
6,247
72,489
$
Rate Dif
191,377
5,273
68,226
783,032
$
4.98%
174,688
4,396
66,020
775,045
$
4.58%
742,276
4.62%
37
SENIOR MANAGEMENT, HEADQUARTERS & BRANCH OFFICIALS
Senior Management
Lourdes A. Leon Guerrero
Bernadine Q. Pereda
VICE PRESIDEN T /LOAN NOTE DEPARTMENT
MANAG ER
Keven F. Camacho
VICE PRESIDENT /GUAM NORTHERN REG IONA L
MANAGER
PRESIDENT AND CHAI R OF THE BOARD
Dawn M. Erwin
Joseph D. Cruz
William D. Leon Guerrero
ASSISTANT
ASSISTANT
EXECUTIVE VICE PRESIDENT & CHIEF OPERATING
OFFICER AND VICE CHAIRMAN OF THE BOARD
VICE PRESIDENT /BUSINESS SERVICES
Janice R. Chargualaf
VICE PRESIDEN T /RISK OFFICER & COMPLIANCE
Francisco M. Atalig
SENIOR VICE PRESIDENT /CHIEF FINANCIAL OFFICER
MANAG ER
Jocelyn B. Miyashita
Wayne S.N. Santos
Josephine L. Mariano
Luke M. Elliott
SENIOR VICE PRESIDENT /CREDIT ADMINISTRATOR
SENIOR VICE PRESIDENT /BRANCH , CENTRAL
OPERATIONS & BSA ADMINISTRATOR
SENIOR VICE PRESIDENT /GENERAL COUNSEL AND
CHIEF RISK OFFICER
ADMINISTRATOR
SYST EMS ADMINISTRATOR
SENIOR VICE PRESIDENT /ECONOMIC AND MARKET
SYSTEMS MANAGER
SENIOR VICE PRESIDENT /CHIEF AUDIT EXECUTIVE
Headquarters Officials
VICE PRESIDENT /ACCO UNTING MANAGER
Craig R. Wade
VICE PRESIDENT /CORPORATE BANKING GROUP
MANAGER
VICE PRESIDENT /OTHE R REAL ESTATE OWNED
Jacqueline Ann Hocog
VICE PRESIDENT /MORTGAGE BANKING GROUP
MANAGER
VICE PRES IDENT /RETAIL BANKING
GROUP MANAGER
Beatrice T. Pereda
MANAGER
VICE PRESIDENT /ASSI STANT CENTRAL OPERATIONS
ADMINISTRATOR
Kathrine C. Lujan
VICE PRESIDENT /BSA MANAGER
ASSISTANT
VICE PRESIDENT /SAIPAN BRA NCH
MANAGER
ASSISTANT
CASHIER /SAIPAN PRICE -COSTCO
IN -STORE FACILITY MANAGER
Teresa U. Palacios
Regional, Branch and
Facility Managers
VICE PRESIDEN T /GUAM CENTRAL -SOUTHERN
REGIONAL MANAGER
VICE PRESIDEN T /HAGÅTÑA
ASSISTANT
ASSISTANT
CASHIER /SAIPAN SAN ANTO NIO
FACILITY MANAGER
Marilyn L. Mendiola
ASSISTANT
CASHIER /TINIAN FACILITY MANA G ER
Lisa M. Leon Guerrero
ASSISTANT
Renee C. Wade
VICE PRESIDENT /ROTA BRA NCH
MANAGER
BRANCH MANAGER
CASHIER /SANTA CRUZ BRANCH
MANAG ER
Richard G. Camacho
Mike W. Naholowaa
VICE PRESIDENT /FSM , RMI & ROP REG IONA L
MANAGER
Vida B. Ricafrente
VICE PRESIDENT /POHNPEI BRANCH MA NA G ER
VICE PRESIDEN T /TAMUNING BRANCH MANAGER
ASSISTANT
VICE PRESIDENT /MANGILAO BRANCH
Joanne H. Akinaga
ASSISTANT
VICE PRESIDENT /CHUUK BRA NCH
MANAGER
MANAGER
Rose A. Reyes
Carmelita M. Cruz
Larry A. Phillip
Sayuri N. Mai
J. John P. Ibanez
Jennifer B. Sanchez
Jessica M. Leon Guerrero
VICE PRESIDENT /LOAN ADJUSTMENT
Frances M. Okougbo
John T.M. Sarmiento
Daniel F. Anderson
Merced M. Tomokane
VICE PRESIDENT /CNMI REGIONAL MAN A G ER
Christine D. Benavente
Lori C. Sablan
VICE PRESIDENT /ANDERSEN A FB
BRANCH MANAGER
OFFICE R
Josephine L. Blas
Elaine J. Lizama
ASSISTANT
VICE PRESIDEN T /EXECUTIVE DEVELOPMENT
STATISTICS OFFICER
ASSISTANT
VICE PRESIDEN T /PRODUCT AND INFORMATION
VICE PRESIDEN T /TRUST DEPARTMENT MANAGER
Joseph P. Bradley
VICE PRESIDENT /YIGO BRA NCH
MANAGER
VICE PRESIDEN T /FINANCIAL SERVICES OFFICER
SENIOR VICE PRESIDENT /INFORMATION
Katherine B. Martir
ASSISTANT
Ann M. Roth
Ernest P. Villaverde
MANAGEMENT
MANAGER
VICE PRESIDEN T /HUMAN RESOURCES MANAGER
SENIOR VICE PRESIDENT /MARKETING
Romeo A. Angel
VICE PRESIDENT /DEDEDO BRANCH MANA G ER
VICE PRESIDEN T /ELECTRONIC DATA PROCESSING
Theresa C. Obispo
Jacqueline A. Marati
VICE PRESIDENT /TUMON BAY BRANCH MANA G ER
VICE PRESIDENT /HARMON BRANCH MA NA G ER
VICE PRESIDEN T /MARKETING MANAGER
MANAGEMENT
David J. Arriola
Benjamin C. Pablo
Mark D. Terlaje
Danilo M. Rapadas
VICE PRESIDENT /UPPER TU MON
BRANCH MANAGER
DIVISION MANAGER
ASSISTANT
CASHIER /MALESSO BRANCH
MANAG ER
Julie A. Gogue
ASSISTANT
MANAGER
CASHIER /NAVAL STATION BRANCH
Katherine R. Lujan
ASSISTANT
VICE PRESIDENT /BELAU BRA NCH
MANAGER
Antonia S.A. Redy
ASSISTANT
VICE PRESIDENT /MAJURO BRA NCH
MANAGER
Shirley N. Quitugua
VICE PRESIDENT /SAN FRANCISCO BRA NCH
38
MANAGER
BOARD OF DIRECTORS
Lourdes A. Leon Guerrero
William D. Leon Guerrero
Martin D. Leon Guerrero
Roger P. Crouthamel
• Bank of Guam President and Chair of the Board
• Chair, Executive Committee, Loan Committee, Tax Recovery &
Litigation Committee
• Senator, 23rd, 24th, 26th, 27th and
28th Guam Legislatures
• Member, Guam Nurses Association
• Member, Guam Memorial Hospital
Board of Trustees
• Member, Teleguam LLC Board of
Directors
• Bank of Guam Vice Chairman of
the Board
• Bank of Guam Executive Vice President and Chief Operating
Officer
• Chairman, Asset & Liability
Committee
• Vice Chairman, Executive, Loan and Tax Recovery & Litigation
Committees
• Regent, University of Guam
• Bank of Guam Board Treasurer and
Assistant Secretary
• Chairman, Trust Committee • Vice Chairman, Audit Committee &
Nominating Committee
• President, Ignacia Corporation
• Secretary/Treasurer, Adztech &
Public Relations, Inc.
• Bank of Guam Board Secretary
• Chairman, Stock Option Committee
& Adhoc Committee
• Vice Chairman, Trust Committee
• Attorney at Law
• Director, Transpacific Travel dba
Travel Pacificana
• Director, Guam Fast Foods dba
Kentucky Fried Chicken
• Director and Vice President, Sports
Concepts, Inc.
Joe T. San Agustin
Ralph G. Sablan, M.D.
Luis G. Camacho, D.D.S., M.S.
Frances L.G. Borja
• Chairman, Audit Committee
and Nominating Committee
• Speaker, 20th, 21st and 22nd Guam
Legislatures
• Senator, 14th - 23rd Guam
Legislatures
• Instructor, University of Guam
• Chairman, Government of Guam
Retirement Fund
• Former Director, Department of Administration, Bureau of Budget
and Management Research
• Private Practice: Dermatology
• U.S. Navy Captain, Retired
• Former President, Guam
Medical Society
• Past President, Guam Dental
Society
• Past Member, Guam Dental Board
• Orthodontist, Retired
• President, Carmen Safeway
Enterprises, Inc.
Joaquin P.L.G. Cook
Joseph “Joey” Crisostomo
Patricia P. Ada
• Bank of Guam Credits Officer
• Partner, Byerly & Cook Company
• Vice President, Guam Healthcare
and Hospital Development
Foundation
• Vice Chairman, Asset & Liability Committee
• President, CarsPlus LLC
• President, CyclesPlus LLC
• President, Rentals Plus LLC dba
Payless Car Rental
• Vice Chairman, Armed Forces
Committee, Guam Chamber of
Commerce
• General Manager, Board Secretary
and Assistant Treasurer, Ada’s
Trust and Investment, Inc.
• Manager, P and M, LLP
• Manager, P.P. Ada Investment
“Too many people held the
notion that our people were
not strong and astute enough
in business to succeed,
a notion I despised, a myth
I was determined to dispel,
which I did.”
Jesus Sablan
Leon Guerrero
JÉSUS IN LITTLE AMERICA
Member FDIC