BANKGUAM HOLDING COMPANY The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of the Company and its wholly-owned subsidiaries, the Bank and BGIS. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of operations. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes presented elsewhere in this Quarterly Report. OverviewBankGuam Holding Company (the "Company") is aGuam corporation organized onOctober 29, 2010 , to act as a holding company ofBank of Guam (the "Bank"), a 17-branch bank serving the communities inGuam , the Commonwealth of theNorthern Mariana Islands ("CNMI"), theFederated States of Micronesia ("FSM"), the Republic of theMarshall Islands ("RMI"), theRepublic of Palau ("ROP"), andSan Francisco, California . OnAugust 15, 2011 , the Company acquired all of the outstanding common stock of the Bank in a holding company formation transaction. InAugust 2015 , the Company chartered a second subsidiary,BankGuam Investment Services ("BGIS"), in an effort to enhance the options and opportunities of our customers to build future income and wealth. BGIS is a registered investment company, primarily involved in providing investment advisory services and trading securities for its customers. InMay 2016 , the Company entered into a Stock Purchase Agreement (the "Agreement") to acquire up to 70% ofASC Trust LLC , formerlyASC Trust Corporation , aGuam trust company. InJuly 2016 , subsequent to the approval of theFederal Reserve Bank of San Francisco inJune 2016 , the first purchase of 25% ofASC Trust LLC was completed. InJuly 2019 , the Company completed the second purchase of an additional 20% ofASC Trust LLC , bringing its ownership to 45%. As stated in Note 4 -Investment Securities , and with the approval of theFederal Reserve Bank of San Francisco , an additional 25% ofASC Trust LLC was purchased by the Company inJuly 2021 . This transaction brought the Company's ownership ofASC Trust LLC to 70%, and completes the transactions contemplated by the Agreement. The Company evaluated its ownership inASC Trust LLC after the last transaction in accordance to ASC 810 - Consolidation, and determined that the Company has control overASC Trust LLC requiring consolidation.ASC Trust LLC is primarily involved in administering 401(k) retirement plans and other employee benefit programs for its customers. Other than holding the shares of theBank, BGIS and ASC Trust LLC , the Company conducts no significant activities, although it is authorized, with the prior approval of its principal regulator, theBoard of Governors of theFederal Reserve System , 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 its assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses and operating income. The Bank's headquarters is located in Hagåtña,Guam , and the Bank provides a variety of financial services to individuals, businesses and government entities through its branch network. The Bank's primary deposit products are demand deposits, savings and time certificates of deposit, and its primary lending products are consumer, commercial and real estate loans. The Bank also provides many other financial services to its customers. In 2021, the Bank permanently closed the Dededo, Harmon andChalan Piao branches. The Bank has been adding digital channels to its product delivery system for several years. The COVID-19 pandemic accelerated the adoption of those digital channels by our customers, which was considered in our decision to close those branches.
The COVID-19 pandemic and resulting governmental responses impacted our operations in 2022 and 2021.See "Note 2 - Summary of Significant Accounting Policies - COVID-19" for discussion.
33
--------------------------------------------------------------------------------Summary of Operating Results
The following table provides unaudited comparative information with respect to our results of operations for the three and six months endedJune 30, 2022 and 2021, respectively: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 % 2022 2021 % Amount Amount Change Amount Amount Change Interest income$ 21,850 $ 20,193 8.2 %$ 42,839 $ 40,706 5.2 % Interest expense 518 358 44.7 % 1,026 710 44.5 % Net interest income, before provision for loan losses 21,332 19,835 7.5 % 41,813 39,996 4.5 % Provision for loan losses 1,425 475 200.0 % 2,850 2,950 -3.4 % Net interest income, after provision for loan losses 19,907 19,360 2.8 % 38,963 37,046 5.2 % Non-interest income 8,526 5,475 55.7 % 15,919 9,685 64.4 % Non-interest expense 23,306 17,389 34.0 % 45,426 35,261 28.8 % Income before income taxes 5,127 7,446 -31.1 % 9,456 11,470 -17.6 % Income tax expense 998 1,536 -35.0 % 1,813 2,265 -20.0 % Net income$ 4,129 $ 5,910 -30.1 % $
7,643
Earnings per common share (EPS): Basic and diluted EPS$ 0.39 $ 0.59 $
0.71
As the above table indicates, our net income decreased in the three and six months endedJune 30, 2022 , as compared to the corresponding periods in 2021. In the three months endedJune 30, 2022 , we recorded net income after taxes of$4.1 million , a decrease of$1.8 million (or 30.1%) as compared to the same period in 2021. The primary reasons for the decrease were the$5.9 million increase in non-interest expense, partially offset by a$3.1 million increase in non-interest income, a$547 thousand increase in net interest income, and a$538 thousand decrease in income tax expense. The increase in non-interest expense is largely due to the increase of$2.3 million in technology, equipment, and depreciation, a$1.6 million increase in salaries and employee benefits, and a$1.6 million increase in general and administrative expenses to include$358 thousand related toASC Trust LLC . The increase in non-interest income is largely due to the$3.2 million increase in service charges and fees, primarily due to the fee income fromASC Trust LLC , and the$580 thousand increase in trustee fees, partially offset by the$919 thousand decrease in other income. In the six months endedJune 30, 2022 , we recorded$7.6 million in net income, a decrease of$1.6 million (or 17.0%) from$9.2 million during the same period in 2021. The primary reasons for the decrease were an increase of$10.2 million in non-interest expense, partially offset by the$6.2 million increase to non-interest income and the$1.9 million increase to net interest income. The increase in non-interest expense is largely due to the increase of$4.6 million in technology, equipment, and depreciation, the$2.1 million increase in salaries and employee benefits, the$2.5 million increase in general and administrative expenses to include$727 thousand related toASC Trust LLC , the$483 thousand increase to training and education, and the$414 thousand increase to professional services. The increase in non-interest income is primarily due to the$7.0 million increase service charges and fees, primarily due to the fee income fromASC Trust LLC , the$430 thousand increase in cardholder and merchant net income, and the$514 thousand increase in trustee fees, partially offset by the$1.5 million decrease in other income. The following table shows the increase in our net interest margin in the three and six months endedJune 30, 2022 , and it also indicates the impact that the increase in our net income had on our annualized returns on average assets and average equity. During the three and six months endedJune 30, 2022 , our return on average equity decreased by 3.93% and increased by 2.42%, respectively as compared to the corresponding period in 2021, and our return on average assets decreased by 21 basis points and increased by 9 basis points, respectively, during the same comparative period. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net interest margin 3.39 % 2.86 % 3.27 % 3.15 % Return on average assets 0.61 % 0.82 % 0.78 % 0.69 % Return on average equity 10.54 % 14.45 % 13.40 % 10.98 %
Critical Accounting Policies
The Company's significant accounting policies are set forth in Note 2 in the Notes to the Company's Annual Report on Form 10-K for 2021 filed with theSEC onMarch 28, 2022 , and Note 2 of Item 1 in this report. Our unaudited condensed consolidated financial 34 -------------------------------------------------------------------------------- statements are prepared in accordance with generally accepted accounting principles inthe United States of America ("GAAP") and general practices in the banking industry. Certain of those accounting policies are considered critical accounting policies because they require us to make assumptions and judgments regarding circumstances or trends that could affect the carrying values of our material assets, such as assumptions regarding economic conditions or trends that could impact our ability to fully collect our outstanding loans or ultimately realize the carrying values of certain of our other assets, such as securities that are available for sale. If adverse changes were to occur in the events, trends or other circumstances on which our assumptions or judgments have been based, or other unanticipated events were to happen that might affect our operating results, it could become necessary under GAAP for us to reduce the carrying values of the affected assets in our condensed consolidated statements of financial condition. In addition, because reductions in the carrying values of assets are sometimes effectuated by or require charges to income, such reductions also may have the effect of reducing our income.
Results of Operations
Net Interest Income
Net interest income, the primary component of the Bank's income, refers to the difference between the interest earned on loans, investment securities and other interest-earning assets, and the interest paid on deposits and other borrowed funds. Our interest income and interest expense are affected by a number of factors, some of which are outside of our control, including national and local economic conditions, the monetary policies of theFederal Reserve's Open Market Committee which affect interest rates, competition in the marketplace for loans and deposits, the demand for loans and the ability of borrowers to meet their payment obligations. Net interest income, when expressed as a percentage of average earning assets, is a banking organization's "net interest margin." The following table sets forth our interest income, interest expense and net interest income, and our annualized net interest margin for the three and six months endedJune 30, 2022 and 2021, respectively: Three Months Ended June 30, Six Months Ended June 30, % % 2022 2021 Change 2022 2021 Change Interest income 21,850$ 20,193 8.21 %$ 42,839 $ 40,706 5.24 % Interest expense 518 358 44.69 % 1,026 710 44.51 % Net interest income 21,332$ 19,835 7.55 %$ 41,813 $ 39,996 4.54 % Net interest margin 3.39 % 2.86 % 0.53 % 3.27 % 3.15 % 0.12 %
Net interest income increased by 7.55% and 4.54%, respectively for the three and
six months ended
For the three months endedJune 30, 2022 , net interest income increased by$1.5 million and$1.8 million , respectively, as compared to the same period in 2021. Total interest income increased by$1.7 million due to increases of$1.0 million in earnings on investment securities and$562 thousand from short term investments during the three months endedJune 30, 2022 , compared to the previous year. The increase in our net interest margin was the result of an increase of 0.56% in the yield on our average earning assets in the three months endedJune 30, 2022 , as compared to the corresponding period of 2021, the effect of which was partially offset by an increase in the yield on our average earning liabilities by 0.04%, compared to the same comparative period. Total interest income increased by$2.1 million in the six months endedJune 30, 2022 , compared to the previous year due to increases of$2.0 million in earnings on investment securities and$674 thousand from short term investments, partially offset by$525 thousand decrease in interest income from loans during the six months endedJune 30, 2022 , compared to the same comparative period in the previous year. OnMarch 3, 2020 , theFederal Open Market Committee (FOMC) reduced the target range for federal funds by 50 basis points to 1.00% - 1.25%. This rate was further reduced to a target range of 0% - 0.25% onMarch 16, 2020 . Improvements in econcomic conditions as well as accelerating inflation resulted in theFOMC increasing the target range by 25bps to 0.25% - 0.50% onMarch 16, 2022 , 50bps to 0.75% - 1.00% onMay 4, 2022 , 75bps to 1.50% - 1.75% onJune 15, 2022 , and by 75bps 2.25% to 2.50% onJuly 27, 2022 . The increase in interest rates is expected to have a positive impact to the Company's net interest income as loans and securities reprice. 35
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Average Balances
Distribution, Rate and Yield
The following table sets forth information regarding our average balance sheet, annualized yields on interest-earning assets and interest rates on interest-bearing liabilities, the interest rate spread and the interest rate margin for the three and six months endedJune 30, 2022 and 2021: Three Months Ended June 30, 2022 2021 Average Interest Average Average Interest Average Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate Interest earning assets: Short term investments1$ 336,285 $ 710 0.84 %$ 733,908 $ 148 0.08 % Investment Securities² 874,713 3,408 1.56 % 627,809 2,400 1.53 % Loans³ 1,302,894 17,732 5.44 % 1,407,787 17,645 5.01 % Total earning assets 2,513,892 21,850 3.48 % 2,769,504 20,193 2.92 % Noninterest earning assets 189,359 121,873 Total assets$ 2,703,251 $ 2,891,377 Interest-bearing liabilities: Interest-bearing checking accounts$ 370,809 $ 9 0.01 %$ 346,348 $ 26 0.03 % Savings accounts 1,147,453 29 0.01 % 1,140,536 86 0.03 % Certificates of deposit 26,263 4 0.06 % 28,653 8 0.11 % Subordinated debt 35,000 476 5.44 % 21,667 238 4.39 % Total interest-bearing liabilities 1,579,525 518 0.13 % 1,537,204 358 0.09 % Non-interest bearing liabilities 967,025 1,190,614 Total liabilities 2,546,550 2,727,818 Stockholders' equity 156,701 163,559 Total liabilities and stockholders' equity$ 2,703,251 $ 2,891,377 Net interest income$ 21,332 $ 19,835 Interest rate spread 3.35 % 2.82 % Net interest margin 3.39 % 2.86 % Six Months Ended June 30, 2022 2021 Average Interest Average Average Interest Average Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate Interest earning assets: Short term investments1$ 398,751 $ 889 0.45 %$ 533,633 $ 215 0.08 % Investment securities² 862,605 6,583 1.53 % 592,848 4,599 1.55 % Loans³ 1,293,868 35,367 5.47 % 1,416,142 35,892 5.07 % Total earning assets 2,555,224 42,839 3.35 % 2,542,623 40,706 3.20 % Noninterest earning assets 172,785 127,742 Total assets$ 2,728,009 $ 2,670,365 Interest-bearing liabilities: Interest-bearing checking accounts$ 386,141 $ 19 0.01 %$ 334,843 $ 50 0.03 % Savings accounts 1,170,084 58 0.01 % 1,110,466 164 0.03 % Certificates of deposit 27,627 8 0.06 % 28,757 20 0.14 % Subordinated debt 17,500 941 10.75 % 18,333 476 5.19 % Total interest-bearing liabilities 1,601,352 1,026 0.13 % 1,492,399 710 0.10 % Non-interest bearing liabilities 961,283 1,010,358 Total liabilities 2,562,635 2,502,757 Stockholders' equity 165,374 167,608 Total liabilities and stockholders' equity$ 2,728,009 $ 2,670,365 Net interest income$ 41,813 $ 39,996 Interest rate spread 3.22 % 3.11 % Net interest margin 3.27 % 3.15 %
1 Short term investments consist of interest-bearing deposits that we maintain
with other financial institutions.
36
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2 Includes all investment securities in the Available-for-Sale and the
Held-to-Maturity classifications. The Bank did not own any tax exempt
securities during 2022 and 2021.
3 Loans include the average balance of non-accrual loans. Loan interest income
includes loan fees of
months ended
in the three and six months ended
For the three and six months endedJune 30, 2022 , our total average earning assets decreased by$255.6 million and increased by$12.6 million , respectively, as compared to the same period in 2021. The decrease during the three months endedJune 30, 2022 , compared to the same period in 2021, is attributed to the$397.6 million decrease in our average short term investments and a$104.9 million decrease in our average loan portfolio, partially offset by a$246.9 million increase in our average investment securities. Average noninterest earning assets increased by$67.5 million . In the three and six months endedJune 30, 2022 , average total interest-bearing liabilities increased by$42.3 million and$109.0 million , respectively, in comparison to the same period in 2021. In the three months endedJune 30, 2022 , the increase was comprised of the$6.9 million increase in average savings accounts, an$24.5 million increase in average interest-bearing checking accounts, and a$13.3 million increase in subordinated debt, partially offset by a$2.4 million decrease in average certificate of deposit accounts. During the three months endedJune 30, 2022 , average stockholders' equity decreased by$6.1 million (3.6%) in comparison to the year-earlier period due to decrease in accumulated other comprehensive loss, due to the increase in market rates. Our interest rate spread increased by 12 basis points (3.80%), and our net interest margin also increased by 13 basis points (4.03%) in the six months endedJune 30, 2022 , as compared to the same period in 2021. During the six months endedJune 30, 2022 , the increase in our interest rate spread is attributed to the 15 basis points (4.72%) increase in the average yield on our interest earning assets, from 3.20% to 3.35%, and the increase in the average rate on our interest-bearing liabilities by 3 basis points from 0.10% to 0.13%. The increase in our interest income is primarily due to the 25 bps rate hike inMarch 2022 , 50bps inMay 2022 , and 75 bps inJune 2022 by theFederal Open Market Committee . This impacted our loan portfolio, investment securities, and short term deposits in other banks, including theFederal Reserve Bank of San Francisco . 37 -------------------------------------------------------------------------------- The following table provides information regarding the changes in interest income and interest expense, attributable to changes in rates and changes in volumes, that contributed to the total change in net interest income for the three and six months endedJune 30, 2022 , in comparison to the three and six months endedJune 30, 2021 : Three Months Ended June 30, 2022 vs. 2021 (In thousands) Net Change in Attributable to: Interest Change in Change in Income/Expense Rate Volume Interest income: Short term investments $ 562$ 5,606 $ (5,044 ) Investment securities 1,008 184 824 Loans 87 6,058 (5,971 ) Total interest income 1,657 11,848 (10,191 ) Interest expense: Interest-bearing checking accounts (17 ) (70 ) 53 Savings accounts (57 ) (229 ) 172 Certificates of deposit (4 ) (15 ) 11 Other borrowings 238 227 11 Total interest expense 160 (87 ) 247 Net interest income $ 1,497$ 11,935 $ (10,438 ) Six Months Ended June 30, 2022 vs. 2021 (In thousands) Net Change in Attributable to: Interest Change in Change in Income/Expense Rate Volume Interest income: Short term investments $ 674$ 1,949 $ (1,275 ) Investment securities 1,984 (149 ) 2,133 Loans (525 ) 5,635 (6,160 ) Total interest income 2,133 7,435 (5,302 ) Interest expense: Interest-bearing checking accounts (31 ) (67 ) 36 Savings accounts (106 ) (218 ) 112 Certificates of deposit (12 ) (23 ) 11 Other borrowings 465 1,020 (555 ) Total interest expense 316 712 (396 ) Net interest income $ 1,817$ 6,723 $ (4,906 )
Provision for Loan Losses
We maintain allowances for probable loan losses that are incurred as a normal
part of the banking business. As more fully discussed in Note 5 of the notes to
the unaudited condensed consolidated financial statements in Item 1 of this
Quarterly Report on Form 10-Q, an allowance for loan losses has been established
by management in order to provide for those loans which, for a variety of
reasons, may not be repaid in their entirety. The allowance is maintained at a
level considered by management to be adequate to provide for probable losses
that are accrued as of the balance sheet date and based on methodologies applied
on a consistent basis with the prior year. Management's review of the adequacy
of the allowance includes, among other things, loan growth, changes in the
composition of the loan portfolio, an analysis of past loan loss experience and
management's evaluation of the loan portfolio under current economic conditions.
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The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. The Bank recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things: general
economic conditions; the type of loan being made; the credit worthiness of the
borrower over the term of the loan; and, in the case of a collateralized loan,
the quality and valuation of the collateral for such loan. The allowance for
loan losses represents the Bank's best estimate of the allowance necessary to
provide for probable losses in the portfolio as of the balance sheet date.
If management determines that it is necessary to increase the allowance for loan
losses, a provision for loan losses is recorded. For the three months ended
June 30, 2022 , the Bank's provision for loan losses was $1.4 million , which was
$950 thousand higher than the corresponding period of 2021. The increase is
primarily due to the $2.0 million reversal in the year-earlier period and the
reduction in the monthly provision for loan losses from $825 thousand to $475
thousand , which were due to the declining risk in the loan portfolio resulting
from the decrease in net charge offs, the decrease in the delinquency ratio, and
the decrease in non-accrual loans.
For the six months ended June 30, 2022 , the Bank's provision for loan losses was
$2.9 million , which was $100 thousand lower than during the corresponding period
of 2021. The decrease is mainly due to the reduction in the monthly provision
for loan losses from $825 thousand to $475 thousand . In the three and six months
ended June 30, 2022 , management adjusted the economic risk factors to
incorporate the current economic conditions, which includes fluctuations in
tourism, unemployment due to the COVID-19 pandemic and inflationary concerns.
Management believes that the provision recorded was sufficient to offset the
incremental risk of loss inherent in the gross loan portfolio of $1.36 billion
at June 30, 2022 , an increase of $38.9 million from December 31, 2021 . The
allowance for loan losses at June 30, 2022 , was at $35.7 million or 2.63% of
total gross loans outstanding as of the balance sheet date, an increase of $1.3
million from December 31, 2021 . We recorded net loan charge-offs of $778
thousand and $1.5 million for the three and six months ended June 30, 2022 ,
respectively. See "Analysis of Allowance for Loan Losses" in the Financial
Condition Section of Management's Discussion and Analysis of Financial Condition
and Results of Operations for more detailed information.
Non-Interest Income
The table below represents the major components of non-interest income and the
changes therein for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Amount Percent 2022 2021 Amount Percent
Amount Amount Change Change Amount Amount Change Change
Non-interest income
Service charges and fees $ 5,099 $ 1,836 $ 3,263 177.7 % $ 10,552 $ 3,506 $ 7,046 201.0 %
Gain on sale of investment
securities - - - 0.0 % - 272 (272 ) -100.0 %
Income from merchant
services, net 891 758 133 17.5 % 1,543 1,406 137 9.7 %
Income from cardholders,
net 985 991 (6 ) -0.6 % 1,538 1,245 293 23.5 %
Trustee fees 729 149 580 389.3 % 815 301 514 170.8 %
Other income 822 1,741 (919 ) -52.8 % 1,471 2,955 (1,484 ) -50.2 %
Total non-interest income $ 8,526 $ 5,475 $ 3,051 55.7 % $ 15,919 $ 9,685 $ 6,234 64.4 %
For the three months ended June 30, 2022 , non-interest income totaled $8.5
million , which represented an increase of $3.1 million (55.7%) as compared to
the three months ended June 30, 2021 . The increase during the three months ended
June 30, 2022 , is primarily attributed to the increases in income of $3.3
million from service charges and fees, $580 thousand in trustee fees, and $133
thousand in net income from merchants, partially offset by a $919 thousand
decrease in other income. The increase in service charges and fees is primarily
due to the $2.6 million in fees generated by ASC Trust activities and an
increase in the Bank's service charges and fee income of $613 thousand .
For the six months ended June 30, 2022 , non-interest income totaled $15.9
million , which was an increase of $6.2 million (64.4%) as compared to the six
months ended June 30, 2021 . The increase during the six months ended June 30,
2022 , is primarily attributed the $7.0 million from service charges and fees, of
which $5.3 million is from income from ASC Trust LLC , and increases of $514
thousand in trustee fees, $293 thousand net income from cardholders, and $137
thousand in net income from merchant services. This is partially offset by
decreases of $272 thousand from gain on sale of investment securities and $1.5
million in other income.
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Non-interest Expense
The table below represents the major components of non-interest expense and the
changes for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Amount Percent 2022 2021 Amount Percent
Amount Amount Change
Change Amount Amount Change Change
Non-interest expense:
Salaries and employee benefits
2,443 2,132 311 14.6 % 4,663 4,261 402 9.4 % Technology, equipment and
2,264
depreciation 5,347 3,083 73.4 % 10,668 6,024 4,644 77.1 %
Insurance 466 515 (49 ) -9.5 % 923 1,005 (82 ) -8.2 %
Telecommunications 405 389 16 4.1 % 855 756 99 13.1 %
FDIC insurance assessment 296 516 (220 ) -42.6 % 618 860 (242 ) -28.1 %
Professional services 804 627 177 28.2 % 1,607 1,192 415 34.8 %
Contract services 471 719 (248 ) -34.5 % 919 1,340 (421 ) -31.4 % Other real estate owned
13 13 - 0.0 % 25 27 (2 ) -7.4 %
Stationery and supplies 161 (48 ) 209 -435.4 % 330 73 257 352.1 %
Training and education 307 40 267 667.5 % 567 84 483 575.0 %
General, administrative and 2,978 1,399 1,579 other
112.9 % 5,409 2,939 2,470 84.0 %
Total non-interest expense
For the three months endedJune 30, 2022 , non-interest expense totaled$23.3 million , which was an increase of$5.9 million (34.0%) as compared to the same period in 2021. The increase is attributed to the increases of$2.3 million in technology, equipment and depreciation,$1.6 million in salaries and employee benefits,$311 thousand in occupancy,$177 thousand in professional services,$267 thousand in training and education,$209 thousand in stationery and supplies and$1.6 million in general, administrative and other, partially offset by decreases of$248 thousand in contract services and$220 thousand inFDIC insurance assessment. For the six months endedJune 30, 2022 , non-interest expense totaled$45.4 million , which represented an increase of$10.2 million (28.8%) as compared to the same period in 2021. The increases are primarily attributed to the$4.6 million increase in technology, equipment, and depreciation,$2.5 million increase in general, administrative and other expense,$2.1 million increase in salaries and employee benefits,$483 thousand increase in training and education,$415 thousand increase in professional services, and$402 thousand increase in occupancy. These expenses were offset by decreases of$421 thousand in contract services and$242 thousand in theFDIC insurance assessment. The increase in general, administrative and other expenses is due to$728 thousand inASC Trust LLC related expenses, and increases in sundry losses of$884 thousand , advertising expense of$265 thousand , public relations expense of$139 thousand , and donation expense of$100 thousand .
Income Tax Expense
For the three and six months endedJune 30, 2022 , the Bank recorded income tax expenses of$998 thousand and$1.8 million , respectively. The expense for the three and six months endedJune 30, 2022 , was$538 thousand and$452 thousand less, respectively, than the income tax expense recorded for the corresponding periods in 2021. 40
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Financial Condition
Assets
As ofJune 30, 2022 , total assets were$2.67 billion , a decrease of 4.18% from$2.79 billion atDecember 31, 2021 . This$116.7 million decrease was comprised largely of the$233.8 million decrease in interest bearing deposits in banks, partially offset by the$41.2 million increase in our net investment securities portfolio, a$29.9 million increase in other assets, a rise of$37.8 million in net loans, and a$1.9 million increase in cash and due from banks. The increases in other assets is primarily due to the increase in deferred tax assets of$15.2 million , bank owned life insurance of$10.3 million and right of use lease asset of$5.1 million . The reduction in assets was associated with the$85.4 million decrease in total deposits and a$41.5 million decrease in accumulated other comprehensive loss, due to the increase in market rates, partially offset by a$5.0 million increase in retained earnings and a$5.2 million increase in other liabilities. Interest-Earning Assets
The following table sets forth the composition of our interest-earning assets at
June 30, 2022 December 31, 2021 Variance
Interest-earning deposits with financial
institutions (including
restricted cash) $ 287,061 $ 520,893 $ (233,832 )
Federal Home Loan Bank stock, at cost 3,318 2,814 504
Investment securities available-for-sale 540,595 499,366 41,229
Investment securities held-to-maturity 318,726 312,294 6,432
Loans, gross 1,360,212 1,321,321 38,891
Total interest-earning assets $ 2,509,912 $ 2,656,688 $ (146,776 )
Loans
Commercial & industrial loans are loans to businesses to finance capital
purchases and improvements, or to provide cash flow for operations. Commercial
mortgage loans include loans secured by real property for purposes such as the
purchase or improvement of that property, wherein repayment is derived from the
income generated by the real property or from business operations. Residential
mortgage loans are loans to consumers to finance the purchase, improvement, or
refinance of real property secured by 1-4 family housing units. Consumer loans
include loans to individuals to finance personal needs and are either closed- or
open-ended loans. Automobile loans fall under the consumer loan category, but
the bulk of consumer loans is typically unsecured extensions of credit such as
credit card debt and personal signature loans.
A summary of loan balances at June 30, 2022 and December 31, 2021 is as follows:
June 30, 2022 December 31, 2021
Amount Percent Amount Percent
Commercial
Commercial & industrial $ 273,389 20.1 % $ 295,835 22.4 %
Commercial mortgage 761,383 56.0 % 699,269 52.9 %
Commercial construction 8,391 0.6 % 23,588 1.8 %
Commercial agriculture 572 0.0 % 592 0.0 %
Total commercial 1,043,735 76.7 % 1,019,284 77.1 %
Consumer
Residential mortgage 144,519 10.6 % 135,377 10.2 %
Home equity 2,537 0.2 % 2,232 0.2 %
Automobile 17,759 1.3 % 18,220 1.4 %
Other consumer loans1 151,662 11.1 % 146,208 11.1 %
Total consumer 316,477 23.3 % 302,037 22.9 %
Gross loans 1,360,212 100.0 % 1,321,321 100.0 %
Deferred loan (fees) costs, net (2,976 ) (3,223 )
Allowance for loan losses (35,732 ) (34,408 )
Loans, net $ 1,321,504 $ 1,283,690
1 Comprised of other revolving credit, installment loans, and overdrafts.
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At June 30, 2022 , total gross loans increased by $38.9 million , to $1.36
billion , from $1.32 billion at December 31, 2021 . The increase in loans was
attributed to a $24.5 million increase in commercial loans to $1.04 billion at
June 30, 2022 from $1.02 billion at December 31, 2021 and a $14.4 million
increase in consumer loans to $316.5 million at June 30, 2022 , from $302.0
million at December 31, 2021 . The underlying increase in commercial loans was
attributed to a $62.1 million increase in commercial mortgage, partially offset
by decreases in commercial & industrial by $22.4 million and commercial
construction by $15.2 million . The underlying increase in consumer loans was
primarily due to the increases of $9.1 million in residential mortgage loans and
$5.5 million in other consumer loans, partially offset by the decrease of $461
thousand in automobile.
With the passage of the Paycheck Protection Program, administered by the Small
Business Administration , the Bank actively participated in assisting its
customers with applications for resources through the program. PPP loans have
either a two-year or a five-year term and earn interest at 1%. The Bank believes
that the majority of these loans will ultimately be forgiven by the SBA in
accordance with the terms of the program. The Bank approved and funded over $149
million in PPP loans. At June 30, 2022 , the outstanding principal balance of PPP
loans was at $5.3 million . It is the Bank's understanding that loans funded
through the PPP program are fully guaranteed by the U.S. government. Should
those circumstances change, the Bank could be required to establish an
additional allowance for loan loss through additional credit loss expense
charged to earnings.
At
Since it first opened in 1972, the Bank has expanded its operations and its branch network, first inGuam , then in the other islands of our region and inSan Francisco, California . In the interests of enhancing performance and stability through market and industry diversification, the Bank has increased its focus on growth in theSan Francisco area in recent years, adding personnel with experience and expertise in theBay Area . The following table provides figures for gross loans in the Bank's administrative regions forJune 30, 2022 andDecember 31, 2021 : June 30, 2022 December 31, 2021 Guam$ 677,134 $ 684,435 Commonwealth of the Northern Mariana Islands 136,251
135,165
The Freely Associated States of Micronesia * 90,510 89,523 California 456,317 412,198 Total$ 1,360,212 $ 1,321,321
* The Freely Associated States (FAS) are comprised of the Federated States of
Islands and the
As the table indicates, the Bank's total gross loans increased by 2.94% during the six months endedJune 30, 2022 . By way of comparison, loans in theCalifornia region increased by$44.1 million , or 10.7%, during the six months endedJune 30, 2022 . Loans in the Commonwealth of theNorthern Mariana Islands increased by$1.1 million or 0.8%, and the Freely Associated States ofMicronesia increased by$987 thousand , or 1.1%, during the same period. In theGuam region loans decreased by$7.3 million , or 1.07%, during the six months endedJune 30, 2022 .
In the current lending and interest rate environment, and in order to maintain sufficient liquidity in the ordinary course of business, and to account for disbursement of the funds received from the CARES Act, the Bank held$286.9 million in unrestricted interest-earning deposits with financial institutions atJune 30, 2022 , a decrease of$233.8 million , or 44.9%, from the$520.7 million in such deposits atDecember 31, 2021 . This significant decrease is the result of the disbursement of various funds received from the CARES Act, which were held in cash balances with theFederal Reserve Bank at the end of the reporting period. FromDecember 31, 2021 toJune 30, 2022 , the Bank's combined investment portfolio increased by$47.7 million , or 5.9%, from$811.7 million to$859.3 million . The growth in the investment portfolio was comprised of a$41.2 million increase in available-for-sale securities, which increased by 8.26%, from$499.4 million to$540.6 million , and a$6.4 million increase in our holdings of held-to-maturity securities, which increased by 2.6%, from$312.3 million to$318.7 million . Management believes that the Bank maintains an adequate level of liquidity. 42
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Nonperforming Loans and Other Nonperforming Assets
Nonperforming loans consist of (i) loans on non-accrual status because we have ceased accruing interest on these loans; (ii) loans 90 days or more past due and still accruing interest; and (iii) restructured loans. Other nonperforming assets consist of real estate properties (OREO) that have been acquired through foreclosure or similar means and which management intends to offer for sale. Loans are placed on non-accrual status when, in the opinion of management, the full and timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payment becomes 90 days past due, unless the loan is adequately collateralized and the loan is in the process of collection. When a loan is placed in non-accrual status, accrued but unpaid interest is reversed against current income. Subsequently, when payments are received on such loans, the amounts are applied to reduce principal, except when the ultimate collectability of principal is probable, in which case accrued loans may be restored to accrual status when principal and interest becomes current and full repayment is expected. Interest income is recognized on an accrual basis for impaired loans not meeting the non-accrual criteria.
The following table contains information regarding our nonperforming assets as
well as restructured loans as of
June 30, 2022 December 31, 2021
Non-accrual loans:
Commercial & industrial $ 7,229 $ 7,610
Commercial mortgage 7,071 8,148
Residential mortgage 1,760 1,660
Other consumer 1 142 152
Total non-accrual loans 16,202 17,570
Loans past due 90 days and still accruing:
Commercial & industrial 106 106
Commercial mortgage - -
Residential mortgage 4 77
Automobile 55 41
Other consumer1 832 866
Total loans past due 90 days and still accruing 997 1,090
Total nonperforming loans 17,199 18,660
Restructured loans:
Accruing loans $ 33,888 $ 32,595
Non-accruing loans (included in nonaccrual
loans above) 4,497 6,083
Total restructured loans $ 38,385 $ 38,678
1 Comprised of other revolving credit, installment loans, and overdrafts.
The above table indicates that nonperforming loans decreased by $1.5 million
during the six months ended June 30, 2022 , which resulted from the decrease in
total non-accrual loans by $1.4 million , from $16.2 million to $17.6 million .
The decrease in total non-accrual loans were due to the decreases of $1.1
million in commercial mortgage and $381 thousand in commercial & industrial
loans, partially offset by an increase of $100 thousand in residential mortgage
loans.
At June 30, 2022 , the Bank's largest nonperforming loans are six commercial
mortgage loans totaling $6.2 million from six relationships of $3.22 million ,
$749 thousand , $682 thousand , $642 thousand , $497 thousand and $456 thousand ,
respectively, and one commercial & industrial loan relationship totaling $6.6
million . These loans were placed on non-accrual due to deficiencies in the
underlying cash flow to service the monthly loan payments and meet operating
expenses. At this time, management believes that the collateral and the
allocated allowance for loan losses is adequate to cover these loans; however,
should property values deteriorate, additional write-downs or additional
provisions may be necessary.
43--------------------------------------------------------------------------------
Analysis of Allowance for Loan Losses
The allowance for loan losses was
Management maintains an allowance for loan losses to absorb estimated credit losses associated with the loan portfolio. The adequacy of the allowance is determined by management through ongoing quarterly loan quality assessments.
Management assesses the estimated credit losses inherent in the non-classified and classified portions of our loan portfolio by considering a number of factors or elements including: • Management's evaluation of the collectability of the loan portfolio; • Historical loss experience in the loan portfolio;
• Levels of and trends in delinquency, classified assets, non-performing and
impaired loans;
• Effects of changes in underwriting standards and other changes in lending
policies, procedures and practices;
• Experience, ability, and depth of lending management and other relevant
staff;
• Local, regional, and national trends and conditions, including
industry-specific conditions;
• The effect of changes in credit concentration; and
• External factors such as competition, legal and regulatory conditions, as
well as typhoons, pandemics such as COVID-19 and other natural disasters.
Management determines the allowance for the classified loan portfolio and for
non-classified loans by applying a percentage loss estimate that is calculated
based on the above noted factors and trends. Management normally writes down
impaired loans after determining the loan collateral fair value versus the
outstanding loan balance. Our analysis of the adequacy of the allowance
incorporates the provisions made for our non-classified loans and classified
loans.
While management believes it uses the best information available for calculating
the allowance, the results of operation could be significantly affected if
circumstances differ substantially from the assumptions used in determining the
allowance. The current qualitative and quantitative factors used to calculate
the allowance are inherently subjective. The estimates and assumptions are
subject to changes in economic prospects and regulatory guidelines, and other
circumstances over which management has no control. The allowance may prove in
the future to be insufficient to cover all of the losses the Bank may incur and
it may be necessary to increase the allowance from time to time as a result of
monitoring its adequacy.
44--------------------------------------------------------------------------------
The following table summarizes the changes in our allowance for loan losses:
Residential
Commercial Mortgages Consumer Total
(Dollars in thousands)
Six Months Ended June 30, 2022
Allowance for loan losses:
Balance at beginning of period $ 22,860 $ 2,304 $ 9,244 $ 34,408
Charge-offs (449 ) - (2,199 ) (2,648 )
Recoveries 143 2 977 1,122
Provision 877 137 1,836 2,850
Ending balance $ 23,431 $ 2,443 $ 9,858 $ 35,732
Allowance balance at end of period
related to:
Loans individually evaluated for
impairment $ 3,513 $ 33 $ 907 $ 4,453
Loans collectively evaluated for
impairment 19,918 2,410 8,951 31,279
Ending balance $ 23,431 $ 2,443 $ 9,858 $ 35,732
Loan balances at end of period:
Loans individually evaluated for
impairment $ 12,260 $ 38,255 $ 1,093 $ 51,608
Loans collectively evaluated for
impairment 1,031,475 108,801 168,328 1,308,604
Ending balance $ 1,043,735 $ 147,056 $ 169,421 $ 1,360,212
Six Months Ended June 30, 2021
Allowance for loan losses:
Balance at beginning of period $ 21,213 $ 1,990 $ 11,602 $ 34,805
Charge-offs (77 ) (4 ) (2,675 ) (2,756 )
Recoveries 156 - 938 1,094
Provision 2,134 367 449 2,950
Ending balance $ 23,426 $ 2,353 $ 10,314 $ 36,093
Allowance balance at end of period
related to:
Loans individually evaluated for
impairment $ 3,503 $ - $ 1,041 $ 4,544
Loans collectively evaluated for
impairment 19,923 2,353 9,273 31,549
Ending balance $ 23,426 $ 2,353 $ 10,314 $ 36,093
Loan balances at end of period:
Loans individually evaluated for
impairment $ 61,338 $ 2,141 $ 1,162 $ 64,641
Loans collectively evaluated for
impairment 1,027,531 130,059 175,443 1,333,033
Ending balance $ 1,088,869 $ 132,200 $ 176,605 $ 1,397,674
Year Ended December 31, 2021
Allowance for loan losses:
Balance at beginning of year $ 21,213 $ 1,990 $ 11,602 $ 34,805
Charge-offs (115 ) (99 ) (4,736 ) (4,950 )
Recoveries 578 1 1,824 2,403
Provision 1,184 412 554 2,150
Ending balance $ 22,860 $ 2,304 $ 9,244 $ 34,408
Allowance balance at end of year related
to:
Loans individually evaluated for
impairment $ 3,510 $ 50 $ 941 $ 4,501
Loans collectively evaluated for
impairment 19,350 2,254 8,303 29,907
Ending balance $ 22,860 $ 2,304 $ 9,244 $ 34,408
Loan balances at end of year:
Loans individually evaluated for
impairment $ 48,459 $ 2,265 $ 1,059 $ 51,783
Loans collectively evaluated for
impairment 970,825 135,343 163,370 1,269,538
Ending balance $ 1,019,284 $ 137,608 $ 164,429 $ 1,321,321 Management evaluates all impaired loans not less frequently than quarterly in conjunction with our calculation and determination of the adequacy of the allowance for loan losses.
45
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The Bank has two significant borrowing relationships in bankruptcy totaling $9.8
million at June 30, 2022 . The Bank has calculated a specific reserve within the
allowance for one of the borrowing relationships in bankruptcy in the amount of
$3.5 million . In March 2022 , a court ruling increased the availability of assets
for one of the borrowing relationships in bankruptcy to satisfy its outstanding
liabilities. The Bank believes it has sufficient collateral coverage to protect
its current exposure in these matters, however due to the complexities of the
bankruptcy cases and uncertainties surrounding ongoing negotiations, the
ultimate outcomes may result in losses.
Total Cash and Cash Equivalents
Total cash and cash equivalents were$325.4 million and$557.4 million atJune 30, 2022 andDecember 31, 2021 , respectively. The decrease is the result of the disbursement of various funds received from the CARES Act. This balance, which is comprised of cash and due from bank balances and interest-bearing deposits that we maintain at other financial institutions (including theFederal Reserve Bank of San Francisco , but excepting restricted cash), will vary depending on daily cash settlement activities, the amount of highly liquid assets needed based on known events such as the repayment of borrowings and scheduled withdrawals, and actual cash on hand in the Bank's branches.
The following table sets forth the composition of our cash and cash equivalent
balances at
June 30, 2022 December 31, 2021 Variance
Cash and due from banks $ 38,529 $ 36,660 $ 1,869
Interest-bearing deposits with financial
institutions 286,911 520,743 (233,832 )
Total cash and cash equivalents $ 325,440 $ 557,403 $ (231,963 )
Investment Securities
The Bank manages its securities portfolio to provide a source of both liquidity
and earnings. The Bank has an Asset/Liability Committee ("ALCO") that develops
and recommends current investment policies to the Board of Directors based on
its operating needs and market circumstances. The Bank's overall investment
policy is formally reviewed and approved annually by the Board of Directors, and
the Asset/Liability Committee is responsible for monitoring and reporting
compliance with the investment policy. Investment portfolio reports are provided
to the Board of Directors on a monthly basis.
46
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At June 30, 2022 , the carrying value of the investment securities portfolio
(excluding ASC Trust LLC stock and Federal Home Loan Bank stock) totaled $859.3
million , which represents a $47.6 million increase from the portfolio balance of
$811.7 million at December 31, 2021 . The table below sets forth the amortized
cost and fair value of our investment securities portfolio, with gross
unrealized gains and losses, at June 30, 2022 and December 31, 2021 :
June 30, 2022
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
Securities Available-for-Sale
U.S. government agency and government
sponsored
enterprise (GSE) debt securities
12 (463 ) 66,333
U.S. government agency or GSE
residential
mortgage-backed securities 419,079 - (43,238 ) 375,841
Total $ 600,834 $ 12 $ (60,251 ) $ 540,595
Securities Held-to-Maturity
U.S. government agency and government
sponsored
enterprise (GSE) debt securities
2 (44 ) 2,101
U.S. government agency or GSE
residential
mortgage-backed securities 39,835 - (4,418 ) 35,417
Total $ 318,726 $ 2 $ (57,034 ) $ 261,694
December 31, 2021
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
Securities Available-for-Sale
U.S. government agency and government
sponsored
enterprise (GSE) debt securities
2 (247 ) 20,861
U.S. government agency or GSE
residential
mortgage-backed securities 369,419 1,957 (3,833 ) 367,543
Total $ 505,494 $ 1,959 $ (8,087 ) $ 499,366
Securities Held-to-Maturity
U.S. government agency and government
sponsored
enterprise (GSE) debt securities
8 (45 ) 2,991
U.S. government agency or GSE
residential
mortgage-backed securities 33,078 105 (369 ) 32,814
Total $ 312,294 $ 113 $ (2,035 ) $ 310,372
At June 30, 2022 and December 31, 2021 , investment securities with a carrying
value of $677.2 million and $558.8 million , respectively, were pledged to secure
various government deposits and other public requirements.
47--------------------------------------------------------------------------------
The amortized cost and fair value of investment securities by contractual
maturity at
June 30, 2022
Available-for-Sale Held-to-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Due within one year $ 8 $ 8 $ - $ -
Due after one but within five years 6,312 6,184 2,864 2,759
Due after five but within ten years 160,317 141,832 60,235 51,913
Due after ten years 434,197 392,571 255,627 207,022
Total $ 600,834 $ 540,595 $ 318,726 $ 261,694
December 31, 2021
Available-for-Sale Held-to-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Due within one year $ 105 $ 105 $ - $ -
Due after one but within five years 8,331 8,377 1,228 1,246
Due after five but within ten years 151,682 148,389 62,925 62,257
Due after ten years 345,376 342,495 248,141 246,869
Total $ 505,494 $ 499,366 $ 312,294 $ 310,372
48--------------------------------------------------------------------------------
The following table shows the gross unrealized losses and fair value of
investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and the
length of time that individual securities have been in a continuous unrealized
loss position at
June 30, 2022
Less Than Twelve Months More Than Twelve Months Total
Unrealized Estimated Unrealized Estimated Unrealized Estimated
Losses Fair Value Losses Fair Value Losses Fair Value
Securities Available for
Sale
U.S. government agency and
government sponsored
enterprise
(GSE) debt securities $ - $ -
(393 ) 55,607 (70 ) 1,465 (463 ) 57,072
U.S. government agency or
GSE
residential
mortgage-backed securities (42,188 ) 369,705 (1,050 )
6,136 (43,238 ) 375,841
Total $ (42,581 ) $ 425,312 $
(17,670 )
Securities Held to Maturity US government agency and sponsored Agencies (GSE) debt securities$ (27,604 ) $ 94,701 $
(24,968 )
(40 ) 1,092 (4 ) 46 (44 ) 1,138
U.S. government agency or
GSE
residential
mortgage-backed securities (4,376 ) 35,152 (42 ) 265,069 (4,418 ) 300,221 Total$ (32,020 ) $ 130,945 $ (25,014 ) $ 394,591 $ (57,034 ) $ 525,536 December 31, 2021 Less Than Twelve Months More Than Twelve Months Total Unrealized Estimated
Unrealized Estimated Unrealized Estimated
Losses Fair Value Losses Fair Value Losses Fair Value
Securities Available for
Sale
U.S. government agency and
government sponsored
enterprise
(GSE) debt securities
(71 ) 5,127 (176 ) 14,743 (247 ) 19,870
U.S. government agency or
GSE
residential
mortgage-backed securities (3,833 ) 290,573 - - (3,833 ) 290,573 Total$ (6,728 ) $ 377,845 $
(1,359 )
Securities Held to MaturityU.S. government agency and government sponsored enterprise
(GSE) debt securities
(37 ) 1,507 (8 ) 403 (45 ) 1,910
U.S. government agency or
GSE
residential
mortgage-backed securities (362 ) 28,498 (7 ) 529 (369 ) 29,027 Total$ (1,794 ) $ 189,845 $ (241 ) $ 115,658 $ (2,035 ) $ 305,503 The Company does not believe that any of the investment securities that were in an unrealized loss position as ofJune 30, 2022 , which included a total of 232 securities, were other-than-temporarily impaired. Specifically, the 232 securities were comprised of 39Small Business Administration Pool securities, 26 agency securities issued byFederal Home Loan Bank (FHLB), 34 mortgaged-backed securities and 19 agency securities issued by Federal Home Loan Mortgage Corporation (FHLMC), 75 mortgaged-backed securities and 1 agency security issued by Federal National Mortgage Association (FNMA), 20 mortgaged-backed securities issued byGovernment National Mortgage Association (GNMA) and 18 agency securities issued by Federal Farm Credit Banks (FFCB). Total gross unrealized losses were primarily attributable to changes in interest rates relative to when the investment securities were purchased, and not due to changes in the credit quality of the investment securities. The Bank does not intend to sell the investment 49 -------------------------------------------------------------------------------- securities that are in an unrealized loss position and it is not likely that, except as needed to fund our liquidity position, the Bank will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity. Deposits AtJune 30, 2022 , total deposit liabilities decreased by$85.4 million from$2.53 billion atDecember 31, 2021 . Non-interest bearing deposits decreased by$60.3 million , to$921.3 million atJune 30, 2022 , compared to$981.5 million atDecember 31, 2021 , and interest bearing deposits decreased by$25.2 million , to$1.53 billion atJune 30, 2022 , from$1.55 billion atDecember 31, 2021 . The 3.37% decrease in total deposits was primarily due to the disbursement of funds from various COVID-19 federal relief programs.
The following table sets forth the composition of our interest-bearing deposit
portfolio with the balances and average interest rates at
June 30, 2022 December 31, 2021
Average Average
Balance rate Balance rate
Interest-bearing checking accounts $ 368,616 0.01 % $ 401,753 0.03 %
Savings accounts 1,131,747 0.01 % 1,123,499 0.03 %
Certificates of deposit 26,179 0.06 %
26,442 0.12 %
Total interest-bearing deposits
As mentioned earlier, the Bank has expanded its operations and its branch network since it first opened in 1972, first inGuam , then in the other islands of our region and inSan Francisco, California . As time has passed, the Bank has gathered market share in each of the islands. In recent years, in order to diversify its geographic market, the Bank has increased its focus on growth in theCalifornia region. The following table provides figures for deposits in the Bank's administrative regions atJune 30, 2022 andDecember 31, 2021 : June 30, 2022 December 31, 2021 Guam$ 1,399,099 $
1,386,314
Commonwealth of theNorthern Mariana Islands 462,913
529,750
The Freely Associated States of Micronesia 524,943 557,444 California 60,851 59,723 Total$ 2,447,806 $ 2,533,231 During the six months endedJune 30, 2022 , the Bank's deposits decreased by$85.4 million (3.37%) to$2.45 billion compared toDecember 31, 2021 . During this period the decrease in our deposits were in our CNMI branches by$66.8 million and FAS branches by$32.5 million . These decreases were partially offset by increases in ourGuam branches by$12.8 million andCalifornia region of$1.1 million . Borrowed Funds The Bank has a variety of sources from which it may obtain secondary funding. These sources include, among others, theFederal Reserve Bank of San Francisco , theFederal Home Loan Bank of Des Moines , and credit lines established with our correspondent banks. Borrowings are obtained for a variety of reasons, which include, but are not limited to, funding loan growth, the purchase of investments in the absence of core deposits, and to provide additional liquidity to meet the demands of depositors. OnJune 29, 2021 , the Company issued$20.0 million of its 4.75% Fixed-to-Floating Rate Subordinated Notes, dueJuly 1, 2031 (the "2031 Notes"). The 2031 Notes are intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. The 2031 Notes have a ten-year term and initially bear interest at a fixed annual rate of 4.75%. Beginning July 1 2026, the interest rate will reset quarterly to the then-current three-month SOFR plus 413 basis points. OnJuly 6, 2021 , with the approval of theFederal Reserve Bank of San Francisco , the Company used$6.2 million of the proceeds from the 2031 Notes to acquire an additional 25% of the stock ofASC Trust LLC at the third and final closing pursuant to the 2016 Stock Purchase Agreement between the Company andDavid J. John . The Company intends to use the remainder of the proceeds from the 2031 Notes for general corporate purposes. OnJune 27, 2019 , the Company issued$15.0 million of its 6.35% Fixed-to-Floating Rate Subordinated Notes, dueJune 30, 2029 (the "2029 Notes"). The 2029 Notes are intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. The 2029 Notes have a ten-year term and initially bear interest at a fixed annual rate of 6.35%. BeginningJune 30, 2024 , the interest rate will reset quarterly to the then-current three-month LIBOR plus 466 basis points. OnJuly 1, 2019 , with the approval of theFederal Reserve Bank of San Francisco , the Company used$4.1 million of the proceeds from the 2029 Notes to acquire an additional 20% of the stock ofASC Trust LLC at the second closing pursuant to the 2016 Stock Purchase Agreement between the Company andDavid J. John . OnJuly 5, 2019 ,$10.0 million of the balance of the proceeds from the 2029 Notes was also used to purchase ten (10) shares of Series B Common Stock from the Bank, with a par value of$1.0 million per share, to support the Bank's strategic growth. 50
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At
Liquidity
We actively manage our liquidity to ensure that sufficient funds are available to meet our needs for cash, including cash needed to fund new loans and to accommodate deposit withdrawals and other transactions by our customers. We project future sources and uses of funds, and maintain additional liquid funds for unanticipated events. Our primary sources of cash include cash we have in deposits at other financial institutions, the repayment of loans, proceeds from the sale or maturity of investment securities, and increases in deposits. The primary uses of cash include funding new loans and making advances on existing lines of credit, purchasing investments, funding new residential mortgage loans, funding deposit withdrawals, and paying operating expenses. From time to time, we may maintain funds in overnight Federal Funds and other short-term investments to provide for short-term liquidity needs. We also have established, for contingency funding purposes, credit lines with theFederal Reserve Bank of San Francisco , the Federal Home Loan Bank-Seattle, and correspondent commercial banks in theU.S. We believe that our liquid assets, together with our available credit lines, will be sufficient to meet normal operating requirements for at least the next twelve months, including to enable us to meet any increase in withdrawals from depository accounts that might occur in the foreseeable future. AtJune 30, 2022 , our liquid assets, which include cash and due from banks, interest-earning deposits with financial institutions (excluding restricted cash), and investment securities available-for-sale totaled$866.0 million , down$190.7 million from$1.06 billion atDecember 31, 2021 . This decrease is comprised of a$233.8 million decrease in interest bearing deposits in banks, partially offset by a$41.2 million increase in investment securities available-for-sale, and a$1.9 million increase in cash and due from banks. Management believes we have sufficient cash to meet the demands of the distribution of funds under the CARES Act. However, we will monitor our vault cash on a daily basis, and if the need arises, we will acquire additional cash by drawing down our deposits with other financial institutions, including theFederal Bank of San Francisco .
Contractual Obligations
The Bank utilizes facilities, equipment and land under various operating leases with terms, including renewal options, ranging from 1 to 99 years.
The following table provides the maturities of lease liabilities atJune 30, 2022 : Operating Leases (a) Total 2022$ 1,521 $ 1,521 2023 2,895 2,895 2024 2,881 2,881 2025 2,825 2,825 2026 2,615 2,615 After 2026 41,882 41,882 Total lease payments 54,619 54,619 Less: Interest (b) 25,318 25,318
Present value of lease liabilities (c)
Note: For leases commencing prior to 2019, minimum lease payments exclude payments to landlords for real estate taxes and common area maintenance.
(a) Operating lease payments include
lease terms that are reasonably certain of being exercised.
(b) Calculated using the incremental borrowing rate based on the lease term for
each lease.
(c) Includes the current portion of $1.9 million for operating 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 the six months ended June 30, 2022 and 2021, approximated $161
thousand and $205 thousand , respectively. During the three months ended June 30,
2022 and 2021, lease payments made to these entities approximated $97 thousand
and $143 thousand , respectively
Additionally, the Bank leases office space to third parties, with original lease
terms ranging from 1 to 3 years with option periods ranging up to 12 years. At
June 30, 2022 , minimum future rents to be received under non-cancelable
operating sublease agreements were $18 thousand and $26 thousand for the periods
ending December 31, 2022 and 2024, respectively.
51--------------------------------------------------------------------------------
A summary of rental activities for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Rent expense $ 1,065 $ 1,015 $ 2,033 $ 2,040
Total rent expense $ 1,065 $ 1,015 $ 2,033 $ 2,040 Off Balance Sheet Arrangements
The Bank is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in our condensed consolidated financial statements. The Bank's exposure to credit loss, in the event of nonperformance by the other parties to financial instruments for loan commitments and letters of credit, is represented by the contractual amount of these instruments. The Bank follows essentially 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
June 30, 2022 December 31, 2021
Commitments to extend credit $ 148,060 $ 162,569
Letters of credit:
Standby letters of credit $ 47,707 $ 43,239
Commercial letters of credit 2,132 2,366
Total $ 49,839 $ 45,605
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 the
shipment of merchandise from a third party. Those letters of credit are
primarily issued to support public and private borrowing arrangements. Almost
all letters of credit issued have expiration dates within one year. The credit
risk involved in issuing letters of credit is effectively the same as that
involved in extending loan facilities to customers. The Bank generally holds
collateral supporting those commitments.
The Bank considers its standby and commercial letters of credit to be
guarantees. At June 30, 2022 , the maximum undiscounted future payments that the
Bank could be required to make was $49.8 million . Almost 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 that are extended to the
Bank's most creditworthy customers are unsecured. The Bank has recorded $51
thousand in reserve liabilities associated with commitments to extend credit and
letters of credit at June 30, 2022 .
Mortgage loans serviced for others are not included in the accompanying
condensed consolidated statements of financial condition. The unpaid principal
balances of mortgage loans serviced for others were $174.7 million and $181.1
million at June 30, 2022 and December 31, 2021 , respectively. At June 30, 2022
and December 31, 2021 , the Bank's mortgage servicing rights each totaled $1.6
million , respectively.
Capital Resources
The Company and the Bank are 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 Company's and the Bank's condensed consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet or
exceed specific capital guidelines that involve quantitative measures of their
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices.
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Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital and Common Equity Tier
1 capital (as defined in the regulations) to risk-weighted assets (as defined)
and of Tier 1 capital (as defined) to average assets (as defined). As of
June 30, 2022 and December 31, 2021 , the Bank met all capital adequacy
requirements to which it is subject.
As of June 30, 2022 , the Bank's capital ratios each exceeded the Federal Deposit
Insurance Corporation's well capitalized standards under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
an institution must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios as set forth in the following table. There have been no
conditions or events since the most recent FDIC notification that management
believes have changed the Bank's category.
The Company's required and actual capital amounts and ratios as of
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
At June 30, 2022 :
Total Capital (to Risk
Weighted Assets) $ 229,097 14.705 % $ 124,637 8.000 % $ 155,796 10.000 %
Tier 1 Capital (to Risk
Weighted Assets) $ 175,227 11.247 % $ 93,477 6.000 % $ 124,637 8.000 %
Tier 1 Capital (to Average
Assets) $ 175,227 6.397 % $ 109,566 4.000 % $ 136,958 5.000 %
Common Equity Tier 1
Capital (to Risk Weighted
Assets) $ 165,444 10.619 % $ 70,108 4.500 % $ 101,267 6.500 %
At December 31, 2021 :
Total Capital (to Risk
Weighted Assets) $ 222,493 15.161 % $ 117,403 8.000 % $ 146,753 10.000 %
Tier 1 Capital (to Risk
Weighted Assets) $ 168,623 11.490 % $ 88,052 6.000 % $ 117,403 8.000 %
Tier 1 Capital (to Average
Assets) $ 168,623 5.792 % $ 116,461 4.000 % $ 145,577 5.000 %
Common Equity Tier 1
Capital (to Risk Weighted
Assets) $ 158,840 10.824 % $ 66,039 4.500 % $ 95,390 6.500 %
Since the formation of BankGuam Holding Company in 2011, our assets have grown
by 142.5% ($1.57 billion ), while our stockholders' equity has increased by 62.6%
($55.5 million , including $86.7 million in retained earnings). The growth in
equity has contributed to help keep the capital ratios to be well above the well
capitalized standards.
The Bank received a large influx of deposits from the federal relief programs
due to the COVID-19 pandemic, resulting in the growth of its balance sheet as
compared to 2020. As of June 30, 2022 , approximately $137.5 million in COVID
related funds have yet to be disbursed. Although the Bank's average assets
decreased at June 30, 2022 to $2.70 billion from $2.91 billion in December 31,
2021 , the growth resulting from the receipt of COVID funds has put pressure on
its ratio of Tier 1 capital to average assets. Management believes that the Bank
has the capacity to absorb the growth in total assets, and the tools needed to
move deposits off its balance through its Trust services to continue to be above
the well capitalized standards under the regulatory framework for prompt
corrective action.
Reverse Stock Split
OnApril 12, 2022 , the Company's Board of Directors approved a 1-for-500 reverse stock split of the Company's common stock. Subsequently onJuly 25, 2022 , the Company held its annual shareholders meeting and the shareholders approved the reverse stock split. The Company expects to complete the transaction in the fourth quarter of 2022, subject to the receipt of all regulatory approvals. If the reverse stock split is effected, shareholders of the Company who own fewer than 500 shares of the Company's common stock will receive a cash payment in lieu of a fraction of a share, and will no longer be shareholders of the Company. Shareholders holding 500 or more shares of the Company's common stock will remain shareholders after the reverse stock split, and will also be entitled to receive a cash payment in lieu of receiving a fraction of a share. The Board of Directors determined that$14.75 per share outstanding prior to the reverse stock split would be a fair price to pay for shares that will be canceled in lieu of issuing a fraction of a share in connection with the reverse stock split. The Board of Directors has reserved the right to abandon the reverse stock split at any time if it believes the reverse stock split is no longer in the Company's best interests. If effected, the Company estimates that the aggregate 53
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amount of cash that would be payable to shareholders in lieu of fractional
shares as a result of the reverse stock split would be approximately
Stock Purchase Plan
The Company's 2011 Employee Stock Purchase Plan (the "2011 Plan") was adopted by the Company's Board of Directors and approved by the Company's Stockholders onMay 2, 2011 , to replace the Company's 2001 Non-Statutory Stock Option Plan. This plan was subsequently adopted by the Company after the reorganization. The 2011 Plan is open to all employees of the Company and its subsidiaries who have met certain eligibility requirements. Under the 2011 Plan, as amended and restated as ofJuly 1, 2012 , eligible employees can purchase, through payroll deductions, shares of common stock at a discount. The right to purchase stock is granted to eligible employees during a quarterly offer period that is established from time to time by the Board of Directors of the Company. Eligible employees cannot accrue the right to purchase more than$25 thousand worth of stock at the fair market value at the beginning of each offer period. Eligible employees also may not purchase more than one thousand five hundred (1,500) shares of stock in any one offer period. The shares are purchased at 85% of the fair market price of the stock on the enrollment date.
In
Contingency Planning and Cybersecurity
The Bank has developed a comprehensive business continuity plan to manage disruptions that affect customers or internal processes, whether caused by man-made or natural events. In modern banking, technology has taken on an increasingly important role, and the Bank also has a technology recovery component incorporated into the business continuity plan that provides procedures for recovering from a technology failure. The technology recovery procedures are tested and implemented from time to time. The recovery time objectives for the Bank's major technological processes range from eight hours to 80 hours, with the goal of enabling the Bank to maintain or resume operations with a minimum impact on its customers. As the results of testing are analyzed and as technology continues to advance, improvements are made in the Bank's processes and procedures as the plan evolves, although there can be no assurance that business disruption or operational losses will not occur. The rapid advances in computing and telecommunications technology over the past several decades have brought with them increasingly sophisticated methods of delivering financial services through electronic channels. Along with these advances, though, have come risks regarding the integrity and privacy of data, and these risks apply to banking, falling into the general classification of cybersecurity. The Bank has made substantial investments in multiple systems to ensure both the integrity of its data and the protection of the privacy of its customers' personal financial and identity information. While it is not possible for anyone to give an absolute guarantee that data will not be compromised, the Bank strives to provide a reasonable assurance that the financial and personal data that it holds are secure.
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