Document And Entity Information
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Document And Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Mar. 15, 2012
Jun. 30, 2011
Document And Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2011    
Document Fiscal Year Focus 2011    
Document Fiscal Period Focus FY    
Entity Registrant Name BankGuam Holding Co    
Entity Central Index Key 0001527383    
Current Fiscal Year End Date --12-31    
Entity Filer Category Smaller Reporting Company    
Entity Common Stock, Shares Outstanding   8,778,697  
Entity Well-known Seasoned Issuer No    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Public Float     $ 29,600,842

Consolidated Statements Of Financial Condition
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Consolidated Statements Of Financial Condition (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
ASSETS    
Cash and due from banks $ 40,902 $ 32,102
Federal Funds sold 5,000 10,000
Interest bearing deposits in banks 85,057 59,376
Total cash and cash equivalents 130,959 101,478
Restricted cash 150 1,150
Investment securities available-for-sale, at fair value 171,886 191,312
Investment securities held-to-maturity, at amortized cost 47,467 28,366
Federal Home Loan Bank stock, at cost 2,198 2,198
Loans, net of allowance for loan losses (12/31/11: $11,101 and 12/31/10: $9,408) and deferred fees 728,198 611,139
Accrued interest receivable 3,418 6,723
Premises and equipment, net 18,103 18,713
Goodwill 783 783
Other assets 37,800 28,739
Total Assets 1,140,962 990,601
LIABILITIES AND STOCKHOLDERS' EQUITY    
Non-interest bearing 280,042 232,956
Interest bearing 758,297 656,319
Total deposits 1,038,339 889,275
Accrued interest payable 164 233
Borrowings 10,200 15,000
Other liabilities 2,225 1,741
Total liabilities 1,050,928 906,249
Commitments and contingencies (Note 16)      
Stockholders' equity:    
Common stock $0.2083 par value; 48,000 shares authorized; 8,811 and 8,747 shares issued and 8,779 and 8,715 shares outstanding at 12/31/11 and 12/31/10, respectively 1,835 1,830
Additional paid-in capital 15,284 13,683
Retained earnings 72,859 70,532
Accumulated other comprehensive income (loss) 346 (1,403)
Stockholders' equity excluding treasury stock 90,324 84,642
Common stock in treasury, at cost (32 shares) (290) (290)
Total stockholders' equity 90,034 84,352
Liabilities and Equity $ 1,140,962 $ 990,601

Consolidated Statements Of Financial Condition (Parenthetical)
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Consolidated Statements Of Financial Condition (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
Consolidated Statements Of Financial Condition [Abstract]    
Loans, allowance for loan losses $ 11,101 $ 9,408
Common stock, par value $ 0.2083 $ 0.2083
Common stock, shares authorized 48,000 48,000
Common stock, shares issued 8,811 8,747
Common stock, shares outstanding 8,779 8,715
Common stock in treasury, shares 32 32

Consolidated Statements Of Income
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Consolidated Statements Of Income (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Interest income:      
Loans $ 45,015 $ 43,206 $ 40,572
Investment securities 5,834 5,605 8,529
Federal Funds sold 9 13 46
Deposits with banks 422 593 477
Total interest income 51,280 49,417 49,624
Interest expense:      
Time deposits 437 656 1,692
Savings deposits 4,747 4,796 6,228
Other borrowed funds 431 576 1,105
Total interest expense 5,615 6,028 9,025
Net interest income 45,665 43,389 40,599
Provision for loan losses 4,617 3,125 2,550
Net interest income, after provision for loan losses 41,048 40,264 38,049
Non-interest income:      
Service charges and fees 4,097 3,894 4,264
Investment securities gains, net 1,342 2,603 2,722
Gain on sale of assets 1,058 0 0
Income from merchant services 1,252 1,254 1,219
Income from cardholders 1,617 1,520 1,273
Telegraphic & cable fees 701 737 594
Trustee fees 698 728 619
Other income 1,832 1,509 1,463
Total non-interest income 12,597 12,245 12,154
Non-interest expenses:      
Salaries and employee benefits 23,095 19,580 18,840
Occupancy 6,008 5,861 5,673
Furniture and equipment 4,953 5,128 5,505
Insurance 1,710 1,695 1,640
Telecommunications 1,242 1,282 1,239
Federal Depository Insurance Corporation assessment 1,189 1,467 1,811
Contract services 1,076 1,013 981
Professional services 848 952 732
Stationery & supplies 812 689 746
Education 750 717 744
General, administrative and other 5,470 4,689 4,863
Total non-interest expenses 47,153 43,073 42,774
Income before income taxes 6,492 9,436 7,429
Income tax (benefit) expense (240) 2,344 1,928
Net income   $ 7,092 $ 5,501
Earnings per share:      
Basic $ 0.77 $ 0.81 $ 0.63
Diluted $ 0.64 $ 0.79 $ 0.62
Dividends declared per share $ 0.500 $ 0.500 $ 0.500
Basic weighted average shares 8,752 8,744 8,686
Diluted weighted average shares 10,599 8,748 8,811

Consolidated Statements Of Comprehensive Income
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Consolidated Statements Of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Consolidated Statements Of Comprehensive Income [Abstract]      
Net income   $ 7,092 $ 5,501
Other comprehensive income, net of tax effects:      
Unrealized holding loss on available-for-sale securities arising during the period (794) (2,333) (4,407)
Reclassification for gains realized on available-for-sale securities during the period 2,400 2,603 2,722
Amortization of unrealized holding loss on held-to-maturity securities during the period 143 108 130
Total other comprehensive income 1,749 378 (1,559)
Comprehensive income $ 8,481 $ 7,470 $ 3,942

Consolidated Statements Of Stockholders' Equity
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Consolidated Statements Of Stockholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Common Stock [Member]
Paid-In Capital [Member]
Accumulated Other Comprehensive Income/(Loss) [Member]
Retained Earnings [Member]
Treasury Stock [Member]
Comprehensive Income [Member]
Total
Beginning Balances at Dec. 31, 2008 $ 1,813 $ 13,097 $ (222) $ 66,616 $ (290)   $ 81,014
Beginning Balances, shares at Dec. 31, 2008 8,635,506            
Comprehensive income:              
Net income 0 0 0 5,501 0 5,501 5,501
Other comprehensive income, net of tax:              
Unrealized gain on available-for-sale securities 0 0 (1,559) 0 0 (1,559) (1,559)
Comprehensive income           3,942  
Common stock issued under Employee Stock Option Plan 7 260 0 0 0   267
Cash dividends on common stock 0 0 0 (4,328) 0   (4,328)
Ending Balances at Dec. 31, 2009 1,820 13,357 (1,781) 67,789 (290)   80,895
Ending Balances, shares at Dec. 31, 2009 8,669,487            
Comprehensive income:              
Net income 0 0 0 7,092 0 7,092 7,092
Other comprehensive income, net of tax:              
Unrealized gain on available-for-sale securities 0 0 378 0 0 378 378
Comprehensive income           7,470  
Common stock issued under Employee Stock Option Plan 10 326 0 0 0   336
Cash dividends on common stock 0 0 0 (4,349) 0   (4,349)
Ending Balances at Dec. 31, 2010 1,830 13,683 (1,403) 70,532 (290)   84,352
Ending Balances, shares at Dec. 31, 2010 8,714,116            
Comprehensive income:              
Net income 0 0 0 6,011 0 6,011  
Other comprehensive income, net of tax:              
Unrealized gain on available-for-sale securities 0 0 1,749 0 0 1,749 1,749
Comprehensive income           7,760  
Stock compensation expense   1,164   721     1,885
Common stock issued under Employee Stock Option Plan 5 437 0 0 0   442
Cash dividends on common stock 0 0 0 (4,404) 0   (4,404)
Ending Balances at Dec. 31, 2011 $ 1,835 $ 15,284 $ 346 $ 72,859 $ (290)   $ 90,034
Ending Balances, shares at Dec. 31, 2011 8,778,697            

Consolidated Statements Of Cash Flows
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Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Cash flows from operating activities:      
Net income   $ 7,092 $ 5,501
Adjustments to reconcile net income to net cash provided by operating activities:      
Provision for loan losses 4,617 3,125 2,550
Depreciation and amortization 2,864 3,040 3,250
Amortization of fees, discounts and premiums 1,993 1,677 1,857
Write-down and loss on sales of foreclosed assets, net 136 143 (58)
Proceeds from sales of loans 28,098 32,439 25,119
(Increase) decrease in mortgage servicing rights (86) 23 (246)
Realized gain on sale of available-for-sale securities (1,342) (2,603) (2,722)
Realized gain on sale of assets (1,058) 0 0
Gain on disposal of premises and equipment (87) 0 0
Net change in:      
Accrued interest receivable 3,305 (1,266) (1,324)
Other assets (7,120) 3,670 (16,500)
Accrued interest payable (69) (185) (554)
Other liabilities 428 (624) 737
Net cash provided by operating activities 37,690 46,531 17,614
Cash flows from investing activities:      
Net change in interest bearing deposits with banks 1,000 5,000 (996)
Purchases of securities available-for-sale (247,912) (231,476) (451,913)
Proceeds from sales of securities available-for-sale 219,457 261,196 261,204
Maturities, prepayments and calls of securities available-for-sale 54,781 18,833 111,999
Maturities, prepayments and calls of securities held-to-maturity 8,679 9,961 9,851
Loan originations and principal collections, net (183,540) (97,207) (66,534)
Proceeds from sales of other real estate owned 33 50 168
Proceeds from sales of premises and equipment 368 0 0
Additions to premises and equipment (1,178) (1,114) (1,318)
Net cash (used in) investing activities (148,312) (34,757) (137,539)
Cash flows from financing activities:      
Net increase in deposits 149,065 77,381 72,231
Payment of FHLB advances (6,000) (20,000) (15,000)
Proceeds from FHLB advances 1,000 0 15,000
Proceeds from other borrowings 200 0 0
Repayment of Federal Funds purchased 0 (10,000) 10,000
Proceeds from issuance of common stock 442 336 267
Dividends paid (4,404) (4,349) (4,328)
Net cash provided by financing activities 140,303 43,368 78,170
Net change in cash and cash equivalents 29,481 55,142 (41,755)
Cash and cash equivalents at beginning of year 101,478 46,336 88,091
Cash and cash equivalents at end of year 130,959 101,478 46,336
Supplemental disclosure of cash flow information:      
Interest 4,164 6,213 9,579
Income taxes 129 310 1,528
Supplemental schedule of noncash investing and financing activities:      
Other real estate owned transferred from loans, net 443 878 3,862
Transfer of other real estate owned to loans $ (581) $ (77) $ (126)

Nature Of Business
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Nature Of Business
12 Months Ended
Dec. 31, 2011
Nature Of Business [Abstract]  
Nature Of Business

Note 1 – Nature of Business

Organization

The accompanying consolidated financial statements include the accounts of BankGuam Holding Company ("the Company") and its wholly-owned subsidiary, Bank of Guam ("the Bank"). The Company is a Guam corporation organized on August 15, 2011 to act as a holding company of the Bank, a 24-branch bank serving the communities in Guam, the Commonwealth of the Northern Mariana Islands (CNMI), the Federated States of Micronesia (FSM), the Republic of the Marshall Islands (RMI), the Republic of Palau (ROP), and San Francisco, California. On August 15, 2011, the Company acquired all of the outstanding common stock of the Bank in a holding company formation transaction.

Other than holding of the shares of the Bank, the Company conducts no significant activities, although it is authorized, with the prior approval of its principal regulator, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") to engage in a variety of activities related to the business of banking. Currently, substantially all of the Company's operations are conducted and substantially all of the assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses and operating income. The Bank provides a variety of financial services to individuals, businesses and governments through its branches. The Bank's headquarters is located in Hagåtña, 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 (ROP) and the United States of America. The Bank currently has twelve branches in Guam, five in the CNMI, four in the FSM, one in the RMI, one in the ROP, and one in San Francisco, California. Its primary deposit products are demand deposits, savings and time certificate accounts, and its primary lending products are consumer, commercial and real estate loans.

For ease of reference we will sometimes refer to the Company as "we", "us" or "our."


Summary Of Significant Accounting Policies
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Summary Of Significant Accounting Policies
12 Months Ended
Dec. 31, 2011
Summary Of Significant Accounting Policies [Abstract]  
Summary Of Significant Accounting Policies

Note 2 – Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Bank of Guam ("the Bank") and wholly-owned subsidiaries, BankGuam Properties, Inc. and BankGuam Insurance Underwriters, Ltd. All significant intercompany and inter-branch 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.

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in effect in the United States ("GAAP"), on a basis consistent with prior periods.

Use of Estimates

The preparation of consolidated financial statements in accordance with 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 other real estate owned, fair value of financial instruments, and the carrying value of intangible assets.

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 other banks, all of which mature within ninety days. The Bank is required by the Federal Reserve System to maintain cash reserves against certain of their deposit accounts. At December 31, 2011 and 2010, the required combined reserves totaled approximately $18,872 and $15,613, respectively.

 

Interest Bearing Deposits in Banks

Interest-bearing deposits in banks mature within one year and are carried at cost.

Investment Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as "held-to-maturity," and are recorded at amortized cost. Securities not classified as held-to-maturity, including equity securities with readily determinable fair value, are classified as "available-for-sale" and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest yield method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. The Bank does not hold securities for trading purposes.

Federal Home Loan Bank Stock

The Bank is required to hold non-marketable equity securities, comprised of Federal Home Loan Bank of Seattle ("FHLB") stock, as a condition of membership. These securities are accounted for at cost, which equals par or redemption value. Ownership is restricted and there is no market for these securities. These securities are redeemable at par by the issuing government supported institutions. These securities are periodically evaluated for impairment, considering the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The primary factor supporting the carrying value is the commitment of the issuer to perform its obligations, which includes providing credit and other services to the Bank.

Loans Held for Sale and Mortgage Servicing Rights (MSR)

Mortgage servicing assets are recognized separately when rights are acquired through the sale of mortgage loans. Under the servicing assets and liabilities accounting guidance in ASC Topic 860, "Transfers and Servicing", servicing rights resulting from the sale of loans originated by the Bank are measured at fair value at the date of transfer. The Bank subsequently measures each class of servicing assets using fair value. Under the fair value method, the servicing rights are carried in the statements of financial condition at fair value and the changes in fair value are reported in earnings in the period in which the changes occur. Servicing fee income is recorded as fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, and are recorded as income when earned.

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, an allowance for loan losses, and any deferred fees or costs on originated loans, as well as unamortized premiums or discounts on purchased loans, except for certain purchased loans that fall under the scope of ASC Topic 310-30, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer", which are recorded at fair value on their purchase date.

Interest income is accrued on the unpaid principal balance of loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized as income using the effective interest method over the contractual life of the loans. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Credit card loans and other unsecured consumer loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued but not collected for loans that are placed on non-accrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The Bank evaluated the portfolio of loans acquired from Wells Fargo Financial (the "Wells Portfolio") in December 2011, and has elected to account for a portion of those loans under ASC 310-30. We account for loans under ASC 310-30 when (i) we acquire loans deemed to be impaired when there is evidence of credit deterioration since their origination and it is probable at the date of acquisition that we would be unable to collect all contractually required payments, and (ii) as a general policy election for non-impaired loans that we acquire.

The Wells Portfolio loans were recorded at their estimated fair value at the time of acquisition. Fair value of acquired loans is determined using a discounted cash flow model based on assumptions about the amount and timing of principal and interest payments, estimated prepayments, estimated default rates, estimated loss severity in the event of defaults, and current market rates. Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses is not recorded on the acquisition date.

In accordance with ASC 310-30, and in estimating the fair value of the Wells Portfolio at the acquisition date, we (i) calculated the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (ii) estimated the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represents an estimate of the loss exposure in the covered loan portfolio, and such amount is subject to change over time based on the performance of the covered loans. The carrying value of the Wells Portfolio is reduced by payments received and increased by the portion of the accretable yield recognized as interest income. These loans were acquired with a loss-sharing arrangement. If the bank has credit losses, net of recoveries, of greater than 0.50% of the remaining portfolio in any given year, Wells Fargo Finance will cover those net losses in an amount up to $320 thousand per year for five years.

The excess of expected cash flows at acquisition over the initial fair value of acquired loans is referred to as the "accretable yield" and is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. Subsequent to acquisition, the Company aggregates loans into pools of loans with common risk characteristics, or for loans determined to be impaired at the acquisition date, on an individual basis to account for the acquired loans. Increases in expected cash flows over those originally estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in expected cash flows compared to those originally estimated decrease the accretable yield and are recognized by recording a provision for loan losses and establishing an allowance for loan losses.

Loans accounted for under ASC 310-30 are generally considered accruing and performing loans, as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as non-accrual loans and interest income may be recognized on a cash basis or as a reduction of the principal amount outstanding.

Loan Origination Fees and Costs

All loan origination fees and related direct costs are deferred and amortized to interest income as an adjustment to yield over the respective lives of the loans using the effective interest method, except for loans that are revolving or short-term in nature for which the straight line method is used, which approximates the interest method.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to be likely, and is funded through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The loans in the Wells Portfolio are subject to our internal and external credit review. If and when credit deterioration occurs subsequent to the December 1, 2011, acquisition date, a provision for credit losses for the Wells Portfolio will be charged to earnings for the full amount. Under the accounting guidance of ASC 310-30 for acquired loans, the allowance for loan losses on the Wells Portfolio is measured at each financial reporting period or measurement date, based on expected cash flows. Accordingly, decreases in expected cash flows on the acquired Wells Portfolio as of the measurement date compared to those initially estimated are recognized by recording a provision for credit losses on the Wells Portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loans' obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer loans for impairment disclosures.

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 credit and standby letters of credit. Such financial instruments are recorded as off-balance sheet items when the commitment is made, then recorded as balance sheet items if and when they are funded.

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 depreciated over the estimated lives of the assets or the expected terms of the leases, if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured.

Construction-in-progress consists of accumulated direct and indirect costs associated with the Bank's construction of premises and the purchase of equipment that has not yet been placed in service and, accordingly, has not yet been subjected to depreciation. Such assets begin depreciation over their estimated useful lives when completed and placed in service.

Premises and equipment are periodically evaluated for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash flows of premises and equipment are less than their carrying amount. In that event, the Bank records a loss for the difference between the carrying amount and the estimated fair value of the asset based on quoted prices.

Other Real Estate Owned

Properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of the carrying amount of the loan or the fair value of the property, reduced by estimated selling costs. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the estimated cost to sell. Other real estate owned is estimated using the appraised value of the underlying collateral, discounted as necessary due to management's estimates of changes in economic conditions, less estimated costs to sell. A valuation allowance is increased by provisions charged to earnings. Subsequent write-downs, income and expenses incurred in connection with holding such assets, and gains and losses realized from the sale of such assets, are charged to the valuation allowance.

Goodwill

Goodwill is deemed to have an indefinite life, and is not amortized but is evaluated at least annually for impairment in accordance with ASC Topic 350, "Intangibles – Goodwill and Other". Based upon the Company's most recent evaluation, there are no indicators of impairment.

Treasury Stock

Common stock shares repurchased are recorded as treasury stock at cost.

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 in the FSM, the RMI and Palau to their respective government jurisdictions. U.S. Federal, California and the Commonwealth of the Northern Mariana Islands income taxes are reflected as foreign taxes for financial reporting purposes.

The Bank accounts for income taxes in accordance with income tax accounting guidance ASC Topic 740, "Income Taxes".

The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid for the period by applying the provisions of the enacted tax law to the taxable income. The Bank determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term, "more likely than not," means a likelihood of more than 50 percent; the terms, "examined," and, "upon examination," also include resolution of related appeals or litigation processes, if any.

A tax position that meets the "more likely than not" recognition threshold is initially and subsequently measured as the largest amount of which the tax authority has full knowledge of all relevant information. The determination of whether or not a tax position has met the "more likely than not" recognition threshold considers the facts, circumstances, and information available at the reporting date, and is subject to management's judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Bank recognizes interest and penalties on income taxes as a component of income tax expense.

Dividends Declared

At its discretion, the Company declares dividends to stockholders of record as of a stated declaration date. The Bank declared and paid dividends of $0.125 per share for each share of common stock outstanding in each of the quarters of 2011, 2010 and 2009.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income, including unrealized gains and losses on securities available-for-sale, which are also recognized as separate components of equity.

 

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 have been issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect these estimates.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when, (i) the assets have been isolated from the Bank – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Advertising Costs

Advertising costs are expensed as incurred.


Recent Accounting Pronouncements
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Recent Accounting Pronouncements
12 Months Ended
Dec. 31, 2011
Recent Accounting Pronouncements [Abstract]  
Recent Accounting Pronouncements

Note 3 – Recent Accounting Pronouncements

Transfer of Financial Assets

On January 1, 2010, the Bank adopted the accounting guidance in ASC Topic 860, which amended the GAAP provisions related to the accounting for transfers and servicing of financial assets and extinguishments of liabilities, including the removal of the concept of a qualifying special-purpose entity from GAAP. This new accounting standard also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset. This accounting standard is effective for financial asset transfers occurring after December 31, 2009. The adoption of this accounting standard on January 1, 2010 did not impact the Company's statements of income and financial condition.

Fair Value Measurements and Disclosures

In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-06, "Improving Disclosures About Fair Value Measurements", which added disclosure requirements about transfers into and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements. The Company adopted the provisions of this ASU in preparing the Consolidated Financial Statements for the year ended December 31, 2010. The adoption of these provisions, which were subsequently codified into ASC Topic 820, "Fair Value Measurements and Disclosures", only affected the disclosure requirements for fair value measurements and, as a result, had no impact on the Bank's statements of income and financial condition. See Note 19 for the disclosures required by this ASU.

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

 

Disclosures About Credit Quality

In July 2010, the FASB issued ASU No. 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses", which requires the Company to provide a greater level of disaggregated information about the credit quality of the Company's loans and leases and the Allowance for Loan and Lease Losses (the "Allowance"). This ASU requires the Company to disclose additional information related to credit quality indicators, non-accrual and past due information, and information related to impaired loans and loans modified in a troubled debt restructuring. The provisions of this ASU became effective for the Company's reporting period ended on September 30, 2011. As this ASU amends only the disclosure requirements for loans and leases and the Allowance, the adoption did not have any impact on the Company's statements of income and condition.

In January 2011, the FASB issued ASU No. 2011-01, "Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20". The amendments in ASU No. 2011-01 deferred the effective date related to disclosures about troubled debt restructurings, enabling creditors to provide such disclosures after the FASB completed their project clarifying the guidance for determining what constitutes a troubled debt restructuring. In April 2011, the FASB issued ASU No. 2011-02, "A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring". The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower's effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. ASU No. 2011-02 also ended the FASB's deferral of the additional disclosures related to troubled debt restructurings as required by ASU No. 2010-20. The provisions of ASU No. 2011-02 are effective for the Company's reporting period ended September 30, 2011. The adoption of ASU No. 2011-02 did not have an impact on the Company's statements of income and condition.

Intangibles – Goodwill and Other

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

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

Other Recent Accounting Pronouncements

On April 29, 2011, the FASB issued ASU No. 2011-03, "Reconsideration of Effective Control for Repurchase Agreements", which modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. The ASU eliminates from the assessment of effective control the requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms. This requirement was one of the criteria under ASC 860 that entities used to determine whether the transferor maintained effective control. Although entities must consider all the effective-control criteria under ASC 860, the elimination of this requirement may lead to more conclusions that a repurchase arrangement should be accounted for as a secured borrowing rather than as a sale. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The adoption of ASU No. 2011-03 is not expected to have a material impact on the Company's statements of income and financial condition.

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

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


Interest-Bearing Deposits And Restricted Cash
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Interest-Bearing Deposits And Restricted Cash
12 Months Ended
Dec. 31, 2011
Interest-Bearing Deposits And Restricted Cash [Abstact]  
Interest-Bearing Deposits And Restricted Cash

Note 4 – Interest-Bearing Deposits and Restricted Cash

At December 31, 2011, the Company had $85.2 million in interest bearing deposits at other financial institutions, as compared to $60.5 million at December 31, 2010. The weighted average percentage yields on these deposits were 0.49% at December 31, 2011, and 0.84% at December 31, 2010. Interest bearing deposits with financial institutions can be withdrawn by the Company on demand, and are considered cash equivalents for purposes of the consolidated statements of cash flows.

At December 31, 2011, we had $150 thousand of restricted cash, which is scheduled to mature within one year. By comparison, as of December 31, 2010, restricted cash totaled $1.15 million, and these amounts are included in the interest-bearing deposits in the preceding paragraph. The weighted average percentage yields on these restricted cash deposits were 0.240% and 0.633% at December 31, 2011 and 2010, respectively.


Investment Securities
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Investment Securities
12 Months Ended
Dec. 31, 2011
Investment Securities [Abstract]  
Investment Securities

Note 5 – Investment Securities

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

 

     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities Available-for-Sale

          

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

   $ 19,955       $ 280       $ 0      $ 20,235   

U.S. government agency pool securities

     9,142         79         (1     9,220   

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

     141,602         1,028         (199     142,431   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 170,699       $ 1,387       $ (200   $ 171,886   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held-to-Maturity

          

U.S. government agency pool securities

   $ 2,147       $ 10       $ (25   $ 2,132   

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

     45,320         1,810         0        47,131   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 47,467       $ 1,820       $ (25   $ 49,263   
  

 

 

    

 

 

    

 

 

   

 

 

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

Securities Available-for-Sale

          

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

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

U.S. government agency pool securities

     43,732         531         (67     44,196   

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

     63,822         106         (1,311     62,617   
  

 

 

    

 

 

    

 

 

   

 

 

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

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held-to-Maturity

          

U.S. government agency pool securities

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

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

     25,582         1,489         0        27,071   
  

 

 

    

 

 

    

 

 

   

 

 

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

 

 

    

 

 

    

 

 

   

 

 

 

At December 31, 2011 and 2010, investment securities with a carrying value of $116,387 and $124,133, respectively, were pledged to secure various government deposits and other government requirements.

The amortized cost and fair value of investment securities by contractual maturity at December 31, 2011, are shown below. Securities not due at a single maturity date, such as mortgage backed securities, are shown separately.

 

     December 31, 2011  
     Available-for-Sale      Held-to-Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due after one but within five years

     9,991         10,156         0         0   

Due after five years

     9,964         10,079         0         0   

U.S. government agency pool securities

     9,142         9,220         2,147         2,132   

Mortgage-backed securities

     141,602         142,431         45,320         47,131   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 170,699       $ 171,886       $ 47,467       $ 49,263   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the years ended December 31, 2011, 2010 and 2009, proceeds from sales of available-for-sale securities amounted to $219,457, $253,256 and $261,204, respectively; gross realized gains were $1,574, $2,630 and $2,988, and gross realized losses were $232, $27 and $266 respectively; gross unrealized gains were $1,387, $768 and $353, and gross unrealized losses were $200, $2,014 and $2,008, respectively.

Temporarily Impaired Securities

The following table shows the gross unrealized losses and fair value of the Bank's investments, with unrealized losses that are not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010.

 

     December 31, 2011  
     Less Than Twelve Months      More Than Twelve Months  
     Unrealized
Loss
     Fair Value      Unrealized
Loss
     Fair Value  

Securities Available-for-Sale

           

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

   $ 0       $ 0       $ 0       $ 0   

U.S. government agency pool securities

     0         422         1         87   

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

     199         41,534         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 199       $ 41,956       $ 1       $ 87   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held-to-Maturity

           

U.S. government agency pool securities

   $ 7       $ 709       $ 18       $ 823   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Securities Available-for-Sale

           

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

   $ 636       $ 54,364       $ 0       $ 0   

U.S. government agency pool securities

     0         0         67         11,051   

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

     1,311         55,363         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held-to-Maturity

           

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

   $ 1       $ 18       $ 23       $ 1,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Bank does not believe that the investment securities that were in an unrealized loss position as of December 31, 2011, which comprised a total of 17 securities, were other than temporarily impaired. Specifically, the 17 securities are comprised of the following: 9 Small Business Administration (SBA) Pool securities, 3 mortgage-backed securities issued by FNMA, and 5 mortgage-backed securities issued by Federal Home Loan Mortgage Corporation (FHLMC).

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


Loans
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Loans
12 Months Ended
Dec. 31, 2011
Loans [Abstract]  
Loans

Note 6 – Loans

Outstanding loan balances are presented net of unearned income, net deferred loan fees, and unamortized discount and premium totaling $591 at December 31, 2011. Loans subject to ASC 310-30 are presented net of the related accretable yield and nonaccretable difference.

The loan portfolio consisted of the following at:

 

                                 
     December 31, 2011     December 31, 2010  
   Amount     Percent     Amount     Percent  
   (Dollars in thousands)  

Commercial

                                

Commercial & Industrial

   $ 149,123        20.1   $ 163,517        26.3

Commercial Mortgage

     281,026        37.9     240,911        38.7

Commercial Construction

     7,154        1.0     12,111        2.0
    

 

 

   

 

 

   

 

 

         

Total Commercial

     437,303        59.0     416,539        67.0
         

Consumer

                                

Residential mortgage

     176,736        23.9     89,056        14.3

Home Equity

     1,717        0.2     1,516        0.2

Automobile

     9,620        1.3     0        0

Other Consumer Loans 1

     115,380        15.6     114,842        18.5
    

 

 

   

 

 

   

 

 

         

Total Consumer

     303,453        41.0     205,414        33.0
    

 

 

   

 

 

   

 

 

         

Gross loans

     740,756        100.0     621,953        100.0
            

 

 

           

 

 

 

Deferred fee (income) costs, net

     (1,457             (1,406        

Allowance for loan losses

     (11,101             (9,408        
    

 

 

           

 

 

         

Loans, net

   $ 728,198              $ 611,139           
    

 

 

           

 

 

         

 

1 

Comprised of other revolving credit, installment, and overdrafts.

 

At December 31, 2011, total gross loans increased by $118.8 million, to $740.8 million, up from $622.0 million at December 31, 2010. The growth in loans was largely attributed to (i) an $87.7 million increase in Residential Mortgage loans to $176.7 million from $89.1 million, due to the acquisition of the Wells Fargo portfolio; (ii) a $40.1 million increase in Commercial Mortgage, to $281 million from $240.9 million, due primarily to an increase in CRE loans, mostly from the California region; (iii) the addition of $9.6 million in Automobile loans, which resulted from the segregation of these loans from the rest of the Consumer loans category in 2011. These were offset by (i) a $14.4 million decrease in Commercial & Industrial loans, to $149.1 million from $163.5 million, due to $3 million of loans being re-categorized to Commercial Mortgage, and to paydowns and payoffs of various loans; (ii) a $5.0 million decrease in Commercial Construction loans, to $7.2 million from $12.1 million, due primarily to the reclassification of a $4.0 million loan from Commercial Construction to Commercial Mortgage.

At December 31, 2011, loans outstanding were comprised of approximately 74% variable rate loans and 26% fixed rate loans.

Certain loans acquired in the acquisition of a portfolio of loans from Wells Fargo in December 2011 are subject to ASC 310-30 (formerly SOP 03-3 (see Note 1)). These include loans for which it is probable that we will not collect all contractual principal and interest. Loans within the scope of ASC 310-30 are initially recorded at fair value, and no allowance is carried over or initially recorded. A summary of the major categories of loans outstanding acquired from Wells Fargo showing those subject to ASC 310-30 is presented in the following table.

 

                         
     December 31, 2011  
     ASC 310-30
loans
     All other     Total loans  

Commercial:

                         

Commercial & industrial

   $ 0       $ 149,123      $ 149,123   

Commercial mortgage

     0         281,026        281,026   

Commercial construction

     0         7,154        7,154   
    

 

 

    

 

 

   

 

 

 

Total commercial

     0         437,303        437,303   
       

Consumer:

                         
       

Residential mortgage

     0         176,736        176,736   

Home equity

     0         1,717        1,717   

Automobile

     0         9,620        9,620   

Other consumer loans1

     8,027         107,353        115,380   
    

 

 

    

 

 

   

 

 

 

Total consumer

     8,027         295,426        303,453   
    

 

 

    

 

 

   

 

 

 

Gross loans

     8,027         732,729        740,756   

Deferred fee (income) costs, net

     0         (1,457     (1,457

Allowance for loan losses

     0         (11,101     (11,101
    

 

 

    

 

 

   

 

 

 

Total loans

   $ 8,027       $ 720,171      $ 728,198   
    

 

 

    

 

 

   

 

 

 

 

1 Comprised of other revolving and installment credit and overdrafts.

Allowance for Loan Losses

The allowance for loan losses is first determined by analyzing all classified loans (Substandard and Doubtful) in non-accrual for loss exposure and establishing specific reserves, as needed. ASC 310-10 defines loan impairment as the existence of uncertainty concerning collection of all principal and interest per the contractual terms of a loan. For collateral-dependent loans, impairment is typically measured by comparing the loan amount to the fair value of collateral, less costs to sell, with a specific reserve established for the "shortfall" amount. Other methods can be used in estimating impairment (market price or present value of expected future cash flows discounted at the loan's original interest rate).

The allowance for loan losses is evaluated on a regular basis by management, and is based upon management's periodic review of the collectability of loans in light of historical experience, the nature of volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flow (or collateral value or observable market price) of the impaired loan is lower than the carrying value of the loan. The general component covers unimpaired loans, and is based on historical charge-off experience and expected loss, given the default probability derived from the Bank's internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

Our loss migration analysis tracks a certain number of quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans. These calculated loss factors are then applied to outstanding loan balances for all loans on accrual designated as "Pass," "Special Mention," "Substandard" or "Doubtful" ("classified loans" or "classification categories"). Additionally, a qualitative factor that is determined utilizing external economic factors and internal assessments is applied to each homogeneous loan pool. We also conduct individual loan review analyses, as part of the allowance for loan loss allowance allocation process, applying specific monitoring policies and procedures in analyzing the existing loan portfolios.

Credit Quality Indicators

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

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

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

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

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

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

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

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

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

 

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

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

Set forth below is a summary of the Company's activity in the allowance for loan losses during the years ended:

 

                         
     December 31,  
     2011     2010     2009  
     (Dollars in thousands)  

Balance, beginning of year

   $ 9,408      $ 8,895      $ 9,943   

Provision for loan losses

     4,617        3,125        2,550   

Recoveries on loans previously charged off

     1,596        1,679        1,061   

Charged off loans

     (4,520     (4,291     (4,659
    

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 11,101      $ 9,408      $ 8,895   
    

 

 

   

 

 

   

 

 

 

The allowance for loan losses for the year ended December 31, 2011, reflects an increase of $1.7 million from the allowance for loan losses at the end of 2010, based on the Bank's allowance for loan loss methodology. The Bank has increased the provision for loan losses in each year from 2009 to 2011. The increase in the provision is due to the uncertainty in the local economy, the increase in the California Region loan portfolio, and the addition of the loan portfolio purchased from Wells Fargo Financial. The allowance for loan losses should remain stable into the near future as the local economy and the increase in the loan portfolios settle.

 

Set forth below is information regarding loan balances and the related allowance for loan losses, by portfolio type, for the years ended December 31, 2011 and 2010.

 

                                 
     Commercial     Residential
Mortgages
    Consumer     Total  
     (Dollars in thousands)  

2011

                                

Allowance for loan losses:

                                

Balance at beginning of year

   $ 6,517      $ 324      $ 2,567      $ 9,408   

Charge offs

     (697     (19     (3,804     (4,520

Recoveries

     70        13        1,513        1,596   

Provision

     764        0        3,853        4,617   
    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 6,654      $ 318      $ 4,129      $ 11,101   
    

 

 

   

 

 

   

 

 

   

 

 

 

Allowance balance at end of year related to:

                                

Loans individually evaluated for impairment

   $ —        $ —        $ —        $ —     
    

 

 

   

 

 

   

 

 

   

 

 

 

Loans collectively evaluated for impairment

   $ 6,654      $ 318      $ 4,129      $ 11,101   
    

 

 

   

 

 

   

 

 

   

 

 

 

Loan balances at end of year:

                                

Loans individually evaluated for impairment

   $ 11,864      $ 2,106      $ 193      $ 14,163   

Loans collectively evaluated for impairment

     425,439        176,347        124,807        726,593   
    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 437,303      $ 178,453      $ 125,000      $ 740,756   
    

 

 

   

 

 

   

 

 

   

 

 

 

2010

                                

Allowance for loan losses:

                                

Balance at beginning of year

   $ 6,070      $ 298      $ 2,527      $ 8,895   

Charge offs

     (551     (34     (3,706     (4,291

Recoveries

     188        0        1,491        1,679   

Provision

     810        60        2,255        3,125   
    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 6,517      $ 324      $ 2,567      $ 9,408   
    

 

 

   

 

 

   

 

 

   

 

 

 

Allowance balance at end of year related to:

                                

Loans individually evaluated for impairment

   $ —        $ —        $ —        $ —     
    

 

 

   

 

 

   

 

 

   

 

 

 

Loans collectively evaluated for impairment

   $ 6,517      $ 324      $ 2,567      $ 9,408   
    

 

 

   

 

 

   

 

 

   

 

 

 

Loan balances at end of year:

                                

Loans individually evaluated for impairment

   $ 12,151      $ 3,606      $ 151      $ 15,908   

Loans collectively evaluated for impairment

     404,388        86,966        114,691        606,045   
    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 416,539      $ 90,572      $ 114,842      $ 621,953   
    

 

 

   

 

 

   

 

 

   

 

 

 

Impairment is measured on a loan-by-loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral (if the loan is collateral dependent). Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. The Bank performs direct write-downs of impaired loans with a charge to the allocated component of the allowance, therefore reducing the allocated component of the reserve to zero at the end of each reporting period.

 

Credit Quality

The following table provides a summary of the delinquency status of the Bank's loans by portfolio type:

 

                                                 
     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days and
Greater
     Total Past
Due
     Current      Total Loans
Outstanding
 
     (Dollars in thousands)  

2011

                                                     

Commercial

                                                     

Commercial & industrial

   $ 266       $ 320       $ —         $ 586       $ 148,537       $ 149,123   

Commercial mortgage

     2,903         972         5,266         9,141         271,885         281,026   

Commercial construction

     —           —           2,272         2,272         4,882         7,154   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     3,169         1,292         7,538         11,999         425,304         437,303   

Consumer

                                                     

Residential mortgage

     5,745         2,938         3,091         11,774         164,962         176,736   

Home equity

     92         —           —           92         1,625         1,717   

Automobile

     305         17         3         325         9,295         9,620   

Other consumer

     2,391         1,184         1,514         5,089         110,291         115,380   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     8,533         4,139         4,608         17,280         286,173         303,453   

Total

   $ 11,702       $ 5,431       $ 12,146       $ 29,279       $ 711,477       $ 740,756   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2010

                                                     

Commercial

                                                     

Commercial & industrial

   $ 311       $ 118       $ 239       $ 668       $ 162,849       $ 163,517   

Commercial mortgage

     19         —           5,539         5,558         235,353         240,911   

Construction

     —           —           2,982         2,982         9,129         12,111   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     330         118         8,760         9,208         407,331         416,539   

Consumer

                                                     

Residential mortgage

     2,449         1,477         2,768         6,694         82,362         89,056   

Home equity

     10         —           26         36         1,480         1,516   

Automobile

     —           —           —           —           —           —     

Other consumer

     2,966         1,739         1,693         6,398         108,444         114,842   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     5,425         3,216         4,487         13,128         192,286         205,414   

Total

   $ 5,755       $ 3,334       $ 13,247       $ 22,336       $ 599,617       $ 621,953   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As the above table indicates, total past due loans increased by $6.9 million to $29.3 million as of December 31, 2011, from $22.3 million as of December 31, 2010. Loans past due 30 to 59 days increased by $5.9 million to $11.7 million as of December 31, 2011, from $5.8 million as of December 31, 2010. Loans past due 60-89 days increased $2.1 million to $5.4 million at December 31, 2011, from the prior year. Loans past due 90 days or more decreased by $1.1 million to $12.1 million as of December 31, 2011, from $13.2 million as of December 31, 2010. The Bank's outstanding loan balances have increased $118.8 million over the past year and the delinquency rate at December 31, 2011 was consistent with the level the previous year.

 

Generally, the accrual of interest on a loan is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and it is in the process of collection. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status when principal and interest become current and full repayment is expected. The following table provides information as of December 31, 2011 and 2010, with respect to loans on non-accrual status, by portfolio type:

 

                 
     December 31,  
     2011      2010  
     (Dollars in thousands)  

Non-accrual loans:

                 

Commercial:

                 

Commercial & industrial

   $ 247       $ 381   

Commercial mortgage

     7,597         8,190   

Commercial construction

     2,272         2,982   
    

 

 

    

 

 

 

Total commercial

     10,116         11,553   

Consumer:

                 

Residential mortgage

     2,107         3,580   

Home equity

     —           26   

Automobile

     —           —     

Other consumer

     193         151   
    

 

 

    

 

 

 

Total consumer

     2,300         3,757   
    

 

 

    

 

 

 

Total non-accrual loans

   $ 12,416       $ 15,310   
    

 

 

    

 

 

 

 

The Company classifies its loan portfolios using internal credit quality ratings, as discussed above under Allowance for Loan Losses. The following table provides a summary of loans by portfolio type and the Company's internal credit quality ratings as of December 31, 2011 and 2010.

 

                         
     December 31,  
     2011      2010      Increase
(Decrease)
 
     (Dollars in thousands)  

Pass:

                          

Commercial & industrial

   $ 126,170       $ 151,551       $ (25,381

Commercial mortgage

     240,447         214,061         26,386   

Commercial construction

     4,882         —           4,882   

Residential mortgage

     175,048         86,305         88,743   

Home equity

     1,717         1,516         201   

Automobile

     9,620         —           9,620   

Other consumer

     114,041         113,053         988   
    

 

 

    

 

 

    

 

 

 

Total pass loans

   $ 671,925       $ 566,486       $ 105,439   

Special Mention:

                          

Commercial & industrial

   $ 19,921       $ 585       $ 19,336   

Commercial mortgage

     19,380         —           19,380   

Commercial construction

     —           —           —     

Residential mortgage

     —           —           —     

Home equity

     —           —           —     

Automobile

     —           —           —     

Other consumer

     —           —           —     
    

 

 

    

 

 

    

 

 

 

Total special mention loans

   $ 39,301       $ 585       $ 38,716   

Substandard:

                          

Commercial & industrial

   $ 3,031       $ 11,381       $ (8,350

Commercial mortgage

     20,750         26,850         (6,100

Commercial construction

     2,272         12,111         (9,839

Residential mortgage

     663         667         (4

Home equity

     —           —           —     

Automobile

     —