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 18-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.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. EffectiveJanuary 29, 2021 , the Bank closed the Dededo and Harmon branches inGuam . These two branches have not operated sinceMarch 2020 as a result of the COVID-19 measures. 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 2020 and 2021. See "Note 2 - Summary of Significant Accounting Policies - COVID-19" for discussion.
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--------------------------------------------------------------------------------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, 2021 , and 2020, respectively: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % 2021 2020 % Amount Amount Change Amount Amount Change Interest income$ 20,193 $ 20,653 -2.2 %$ 40,706 $ 42,751 -4.8 % Interest expense 358 650 -44.9 % 710 1,382 -48.6 % Net interest income, before provision for loan losses 19,835 20,003 -0.8 % 39,996 41,369 -3.3 % Provision for loan losses 475 2,400 -80.2 % 2,950 4,607 -36.0 % Net interest income, after provision for loan losses 19,360 17,603 10.0 % 37,046 36,762 0.8 % Non-interest income 5,475 3,221 70.0 % 9,685 7,292 32.8 % Non-interest expense 17,389 16,986 2.4 % 35,261 36,217 -2.6 % Income before income taxes 7,446 3,838 94.0 % 11,470 7,837 46.4 % Income tax expense 1,536 1,081 42.1 % 2,265 1,835 23.4 % Net income$ 5,910 $ 2,757 114.4 %$ 9,205 $ 6,002 53.4 % Earnings per common share (EPS): Basic and diluted EPS$ 0.59 $ 0.27 $ 0.92 $ 0.59 As the above table indicates, our net income increased in the three and six months endedJune 30, 2021 , as compared to the corresponding periods in 2020. In the three months endedJune 30, 2021 , we recorded net income after taxes of$5.9 million , an increase of$3.2 million (or 114.4%) as compared to the same period in 2020. The primary reasons for the increase were the$2.3 million increase in non-interest income, a$2.0 million reversal in provision for loan losses, partially offset by the$168 thousand decrease in net interest income, and an increase of$403 thousand in non-interest expense. The increase in non-interest income is largely due to the$1.3 million increase in merchant and cardholder net income, and the$579 thousand increase in income from the Company's investment inASC Trust LLC . The reversal in the provision for loan losses inJune 2021 was due to declining risk in the loan portfolio, resulting from the decreases in the delinquency ratio, and net charge-offs, and a declining consumer loan portfolio. In the six months endedJune 30, 2021 , we recorded$9.2 million in net income, an increase of$3.2 million (or 53.4%) from$6.0 million during the same period in 2020. The primary reasons for the increase were an increase of$2.4 million in non-interest income, a$1.7 million reduction in the provision for loan losses, and a reduction of$956 thousand in non-interest expense, partially offset by a reduction in net-interest income by$1.4 million . The increase in non-interest income is primarily due to the$1.5 million increase in merchant and cardholder net income, and the$748 thousand increase in income from the Company's investment inASC Trust LLC . The reduction in the provision for loan losses is primarily due to the$2.0 million reversal inJune 2021 . The following table shows the decrease in our net interest margin in the three and six months endedJune 30, 2021 , and it also indicates the impact that the increase in our net income had on our annualized returns on average assets and average equity. Our return on average equity increased by 8.07% and 3.93%, respectively, during the three and six months endedJune 30, 2021 , as compared to the corresponding period in 2020, and our return on average assets increased by 33 basis points and 13 basis points during the same comparative periods, primarily due to the increase in net income, partially offset by the increase in average assets: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net interest margin 2.86 % 3.77 % 3.15 % 4.12 % Return on average assets 0.82 % 0.49 % 0.69 % 0.56 % Return on average equity 14.45 % 6.39 % 10.98 % 7.05 % 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 2020 filed with theSEC onMarch 22, 2021 , and Note 2 of Item 1 in this report. Our unaudited condensed consolidated financial 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 34
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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, 2021 , and 2020, respectively: Three Months Ended June 30, Six Months Ended June 30, % % 2021 2020 Change 2021 2020 Change Interest income 20,193$ 20,653 -2.23 %$ 40,706 $ 42,751 -4.78 % Interest expense 358 650 -44.92 % 710 1,382 -48.63 % Net interest income 19,835$ 20,003 -0.84 %$ 39,996 $ 41,369 -3.32 % Net interest margin 2.86 % 3.77 % -0.91 % 3.15 % 4.12 % -0.98 %
Net interest income decreased by 0.84% and 3.32%, respectively for the three and
six months ended
For the three and six months endedJune 30, 2021 , net interest income decreased by$168 thousand and$1.4 million , resepectively, as compared to the same period in 2020. Total interest income decreased by$460 thousand due to decreases of$1.7 million in earnings on loans, partially offset by$1.1 million in interest income from investment securities during the three months endedJune 30, 2021 , compared to the previous year. The decrease is primarily due to the 150 basis points (1.50%) cut inMarch 2020 . The reduction in our net interest margin was the result of a decrease of 0.98% in the yield on our average earning assets in the three months endedJune 30, 2021 , as compared to the corresponding period of 2020, the effect of which was partially offset by an increase in our average earning assets of 30.5% compared to the same comparative period. Total interest income decreased by$2.0 million in the six months endedJune 30, 2021 , compared to the previous year because of the reduction of$3.2 million in loan interest earnings, partially offset by$1.4 million in earnings on investment securities compared to the corresponding period of 2020. OnMarch 3, 2020 , theFederal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% - 1.25%. This rate was further reduced to a target range of 0% - 0.25% onMarch 16, 2020 . InSeptember 2020 , theFederal Open Market Committee announced that it will allow inflation to exceed 2% to support employment, and forecasted that the federal funds rate would remain unchanged through 2023. These reductions in interest rates and other effects of the COVID-19 outbreak have had an adverse effect on the Company's financial condition and results of operations. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have risen which are likely to continue to negatively impact net interest income. 35
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Average Balances
Distribution, Rate and Yield
The following table sets forth information regarding our average balance sheet, annualized yields on interest-earning assets and interest rates on interest-bearing liabilities, the interest rate spread and the interest rate margin for the three and six months endedJune 30, 2021 , and 2020: Three Months Ended June 30, 2021 2020 Average Interest Average Average Interest Average Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
Interest earning assets: Short term investments1$ 733,908 $ 148 0.08 %$ 329,301 $ 66 0.08 % Investment Securities² 627,809 2,400 1.53 % 419,259 1,260 1.20 % Loans³ 1,407,787 17,645 5.01 % 1,374,079 19,327 5.63 % Total earning assets 2,769,504 20,193 2.92 % 2,122,639 20,653 3.89 %
Noninterest earning assets 121,873 126,741 Total assets$ 2,891,377 $ 2,249,380 Interest-bearing liabilities: Interest-bearing checking accounts$ 346,348 $ 26 0.03 %$ 291,953 $ 76 0.10 % Savings accounts 1,140,536 86 0.03 % 1,009,511 315 0.12 % Certificates of deposit 28,653 8 0.11 % 25,025 21 0.34 % Subordinated debt 21,667 238 4.39 % 14,762 238 6.45 % Total interest-bearing liabilities 1,537,204 358 0.09 % 1,341,251 650 0.19 % Non-interest bearing liabilities 1,190,614 735,413 Total liabilities 2,727,818 2,076,664 Stockholders' equity 163,559 172,716 Total liabilities and stockholders' equity$ 2,891,377 $ 2,249,380 Net interest income$ 19,835 $ 20,003 Interest rate spread 2.82 % 3.70 % Net interest margin 2.86 % 3.77 % Six Months Ended June 30, 2021 2020 Average Interest Average Average Interest Average Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate Interest earning assets: Short term investments1$ 533,633 $ 215 0.08 %$ 238,846 $ 423 0.35 % Investment securities² 592,848 4,599 1.55 % 425,217 3,234 1.52 % Loans³ 1,416,142 35,892 5.07 % 1,341,941 39,094 5.83 % Total earning assets 2,542,623 40,706 3.20 % 2,006,004 42,751 4.26 % Noninterest earning assets 127,742 121,207 Total assets$ 2,670,365 $ 2,127,211 Interest-bearing liabilities: Interest-bearing checking accounts$ 334,843 $ 50 0.03 %$ 289,424 $ 162 0.11 % Savings accounts 1,110,466 164 0.03 % 945,108 703 0.15 % Certificates of deposit 28,757 20 0.14 % 25,831 38 0.29 % Subordinated debt 18,333 476 5.19 % 14,758 479 6.49 % Total interest-bearing liabilities 1,492,399 710 0.10 % 1,275,121 1,382 0.22 % Non-interest bearing liabilities 1,010,358 681,927 Total liabilities 2,502,757 1,957,048 Stockholders' equity 167,608 170,163 Total liabilities and stockholders' equity$ 2,670,365 $ 2,127,211 Net interest income$ 39,996 $ 41,369 Interest rate spread 3.11 % 4.05 % Net interest margin 3.15 % 4.12 %
1 Short term investments consist of interest-bearing deposits that we maintain
with other financial institutions.
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 2021 and 2020.
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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, 2021 , our total average earning assets increased by$646.9 million and$536.6 million , respectively, as compared to the same period in 2020. The increase during the three months endedJune 30, 2021 , compared to the same period in 2020, is attributed to the$404.6 million increase in our average short term investments, a$208.6 million increase in our average investment securities, and a$33.7 million increase in our average loan portfolio. Average noninterest earning assets decreased by$4.9 million . In the three and six months endedJune 30, 2021 , average total interest-bearing liabilities increased by$196.0 million and$217.3 million , respectively, in comparison to the same period in 2020. In the three months endedJune 30, 2021 , the increase was comprised of the$131.0 million increase in average savings accounts, a$54.4 million increase in average interest-bearing checking accounts, a$6.9 million increase in subordinated debt, and a$3.6 million increase in average certificate of deposit accounts. The overall increase in average interest-bearing liabilities resulted from an increase in our deposit base, primarily in consumer savings, and government checking and savings accounts as result of the funds received by depositors from the CARES Act. This was supplemented by an increase of$455.2 million in average non-interest bearing liabilities during the three months endedJune 30, 2021 , compared to the same period in 2020, primarily in traditional checking accounts, moderated an overall increase of$545.7 million in average total liabilities. During the three and six months endedJune 30, 2021 , average stockholders' equity decreased by$9.2 million (5.3%) and$2.6 million (1.5%), respectively, in comparison to the year-earlier period. Our interest rate spread decreased by 94 basis points (0.94%), and our net interest margin decreased by 98 basis points (0.98%) in the six months endedJune 30, 2021 , as compared to the same period in 2020. During the six months endedJune 30, 2021 , the decrease in our interest rate spread is attributed to the 106 basis points (1.06%) decrease in the average yield on our interest earning assets, from 4.26% to 3.20%, partially offset by the decrease in the average rate on our interest-bearing liabilities by 12 basis points from 0.22% to 0.10%. The decrease in our interest income is primarily due to the 150 basis point (1.50%) rate cut inMarch 2020 by theFederal Open Market Committee . This impacted our loan portolio, 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, 2021 , in comparison to the three and six months endedJune 30, 2020 : Three Months Ended June 30, 2021 vs. 2020 (In thousands) Net Change in Attributable to: Interest Change in Change in Income/Expense Rate Volume Interest income: Short term investments $ 82 $ 2 $ 80 Investment securities 1,140 1,371 (231 ) Loans (1,682 ) (8,418 ) 6,736 Total interest income (460 ) (7,045 ) 6,585 Interest expense: Interest-bearing checking accounts (50 ) (216 ) 166 Savings accounts (229 ) (956 ) 727 Certificates of deposit (13 ) (56 ) 43 Other borrowings - (303 ) 303 Total interest expense (292 ) (1,531 ) 1,239 Net interest income $ (168 )$ (5,514 ) $ 5,346 Six Months Ended June 30, 2021 vs. 2020 (In thousands) Net Change in Attributable to: Interest Change in Change in Income/Expense Rate Volume Interest income: Short term investments $ (208 ) $ (654 )$ 446 Investment securities 1,365 129 1,236 Loans (3,202 ) (10,165 ) 6,963 Total interest income (2,045 ) (10,690 ) 8,645 Interest expense: Interest-bearing checking accounts (112 ) (238 ) 126 Savings accounts (539 ) (1,127 ) 588 Certificates of deposit (18 ) (40 ) 22 Other borrowings (3 ) (192 ) 189 Total interest expense (672 ) (1,597 ) 925 Net interest income $ (1,373 )$ (9,093 ) $ 7,720 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. 38 -------------------------------------------------------------------------------- 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 endedJune 30, 2021 , the Bank's provision for loan losses was$475 thousand , which was$1.9 million lower than the corresponding period of 2020. For the six months endedJune 30, 2021 , the Bank's provision for loan losses was$2.9 million , which was$1.7 million lower than during the corresponding period of 2020. The primary reason for the decrease in the provision for loan losses in both periods was due to the$2.0 million reversal inJune 30, 2021 due to declining risk in the loan portfolio resulting from the decreases in the delinquency ratio, and net charge-offs, and a declining consumer loan portfolio. In the three and six months endedJune 30, 2021 , management adjusted the economic risk factors to incorporate the current economic conditions, which includes fluctuations in tourism and unemployment due to the COVID-19 pandemic. Management believes that the provision recorded was sufficient to offset the incremental risk of loss inherent in the gross loan portfolio of$1.40 billion atJune 30, 2021 , a decrease of$34.0 million fromDecember 31, 2020 . The allowance for loan losses atJune 30, 2021 , was at$36.0 million or 2.58% of total gross loans outstanding as of the balance sheet date, an increase of$1.3 million fromDecember 31, 2020 . We recorded net loan charge-offs of$665 thousand and$1.7 million for the three and six months endedJune 30, 2021 . 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,
2021 2020 Amount Percent 2021 2020 Amount Percent
Amount Amount Change Change Amount Amount Change Change
Non-interest income
Service charges and fees $ 1,836 $ 1,563 $ 273 17.5 % $ 3,506 $ 3,302 $ 204 6.2 %
Gain on sale of investment
securities - - - 0.0 % 272 - 272 100.0 %
Income from merchant
services, net 758 331 427 129.0 % 1,406 874 532 60.9 %
Income from cardholders,
net 991 143 848 593.0 % 1,245 300 945 315.0 %
Trustee fees 149 445 (296 ) -66.5 % 301 1,079 (778 ) -72.1 %
Other income 1,741 739 1,002 135.6
% 2,955 1,737 1,218 70.1 %
Total non-interest income
For the three months endedJune 30, 2021 , non-interest income totaled$5.5 million , which represented an increase of$2.3 million (70.0%) as compared to the three months endedJune 30, 2020 . The increase during the three months endedJune 30, 2021 , is primarily attributed to the increases in income of$848 thousand from net income from mechant services,$1.0 million from other income, of which$579 thousand is from income from ASC,$427 thousand from net income from mechant services, and$273 thousand from service charges and fees, partially offset by$296 thousand from trustee fees. For the six months endedJune 30, 2021 , non-interest income totaled$9.7 million , which was an increase of$2.4 million (32.8%) as compared to the six months endedJune 30, 2020 . The increase during the six months endedJune 30, 2021 , is primarily attributed the$1.2 million from other income, of which$748 thousand is from income fromASC Trust LLC , and increases of$945 thousand in net income from cardholders,$532 thousand in net income from merchant services,$272 thosuand from gain on sale of investment securities, and$204 thousand in service charges and fees, partially offset by$778 thousand from trustee fees. 39
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Non-interest Expense
The table below represents the major components of non-interest expense and the
changes for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Amount Percent 2021 2020 Amount Percent
Amount Amount Change
Change Amount Amount Change Change
Non-interest expense:
Salaries and employee benefits
0.8 %
2,132 2,126 6 0.3 % 4,261 4,282 (21 ) -0.5 % Equipment and depreciation
3,083 2,982 101 3.4 % 6,024 5,954 70 1.2 %
Insurance 515 474 41 8.6 % 1,005 947 58 6.1 %
Telecommunications 389 372 17 4.6 % 756 714 42 5.9 %
FDIC insurance assessment 516 324 192 59.3 % 860 603 257 42.6 %
Professional services 627 541 86 15.9 % 1,192 1,119 73 6.5 %
Contract services 719 521 198 38.0 % 1,340 1,037 303 29.2 % Other real estate owned
13 (14 ) 27 -192.9 % 27 14 13 92.9 %
Stationery and supplies (48 ) (2 ) (46 ) 2300.0 % 73 198 (125 ) -63.1 % Training and education
40 21 19 90.5 % 84 206 (122 ) -59.2 % General, administrative and other 1,399 1,704 (305 )
-17.9 % 2,939 3,682 (743 ) -20.2 %
Total non-interest expense
2.4 %$ 35,261 $ 36,217 $ (956 ) -2.6 % For the three months endedJune 30, 2021 , non-interest expense totaled$17.4 million , which was an increase of$403 thousand (2.4%) as compared to the same period in 2020. The increase is attributed to the increases of$198 thousand increase in contract services,$192 thousand in theFDIC insurance assessment,$101 thousand in equipment and depreciation,$86 thousand in professional services, and$67 thousand in salaries and employee benefits, partially offset by a decrease of$305 thousand in general, administrative, and other expenses, primarily due to the decrease of$302 thousand in advertisng expenses as compared to the corresponding period. For the six months endedJune 30, 2021 , non-interest expense totaled$35.3 million , which represented a decrease of$956 thousand (2.6%) as compared to the same period in 2020. The decreases are primarily attributed to the$761 thousand decrease in salaries and emoloyee benefits,$743 thousand decrease in general, administrative, and other expense, the$125 thousand decrease in stationery and supplies, and the$122 thousand decrease in training and education. The decrease in salaries and employee benefits is largely due to the cost recovery from the origination costs from processing the PPP loan originations in accordance with ASC 310-20, "Nonrefundable fees and Other Costs", while the decrease in general, administrative and other expense is primarily due to reduction in advertising expenses. These expenses were offset by an increase of$303 thousand in contract services, and$257 thousand in theFDIC insurance assessment. The decrease in general, administrative and other expenses are primarily due to reduction of$442 thousand in advertising expense,$221 thousand in public relations expense, and$111 thousand in postage and mail expenses.
The Bank has some discretionary capital expenditures that have been temporarily delayed as result of COVID-19. Some of these planned expenditures may be reassessed due to our customers converting to electronic banking channels.
Income Tax Expense For the three and six months endedJune 30, 2021 , the Bank recorded income tax expenses of$1.5 million and$2.3 million , respectively. The expense for the three and six months endedJune 30, 2021 , was$455 thousand and$430 thousand higher, respectively, than the income tax expense recorded for the corresponding periods in 2020. 40
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Financial Condition
Assets
As ofJune 30, 2021 , total assets were$2.93 billion , an increase of 24.6% from the$2.35 billion atDecember 31, 2020 . This$577.5 million increase was comprised largely of the$506.7 million increase in interest bearing deposits in banks, a$103.9 million increase in our net investment securities portfolio, and a$2.9 million in other assets, partially offset by the reduction of$35.1 million in net loans. The decrease in net loans and the increase in total assets resulted in the proportion of net loans to total assets decreasing from 59.2% atDecember 31, 2020 , to 46.3% atJune 30, 2021 . The growth in assets was associated with the$563.7 million increase in total deposits as a result of the various funds received by depositors from the CARES Act, a$20.0 million increase in subordinated debt, a$2.4 million increase in other liabilities, and a$7.0 million increase in retained earnings, partially offset by the$15.7 million decrease in accumulated other comprehensive loss, which is due to the increase in market rates. Interest-Earning Assets
The following table sets forth the composition of our interest-earning assets at
June 30, 2021 December 31, 2020 Variance
Interest-earning deposits with financial
institutions (including
restricted cash) $ 751,571 $ 244,903 $ 506,668
Federal Home Loan Bank stock, at cost 2,814 2,335 479
Investment securities available-for-sale 507,063 510,111 (3,048 )
Investment securities held-to-maturity 153,496 46,584 106,912
Loans, gross 1,397,674 1,431,686 (34,012 )
Total interest-earning assets $ 2,812,618 $ 2,235,619 $ 576,999
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 the balances of loans at June 30, 2021 , and December 31, 2020 ,
follows:
June 30, 2021 December 31, 2020
Amount Percent Amount Percent
Commercial
Commercial & industrial $ 341,060 24.4 % $ 366,942 25.6 %
Commercial mortgage 713,593 51.1 % 685,138 47.9 %
Commercial construction 33,605 2.4 % 51,785 3.6 %
Commercial agriculture 611 0.0 % 629 0.0 %
Total commercial 1,088,869 77.9 % 1,104,494 77.1 %
Consumer
Residential mortgage 130,160 9.3 % 127,371 8.9 %
Home equity 2,040 0.1 % 2,076 0.1 %
Automobile 19,429 1.4 % 19,923 1.4 %
Other consumer loans1 157,176 11.2 % 177,822 12.5 %
Total consumer 308,805 22.1 % 327,192 22.9 %
Gross loans 1,397,674 100.0 % 1,431,686 100.0 %
Deferred loan (fees) costs, net (3,992 ) (4,159 )
Allowance for loan losses (36,093 ) (34,805 )
Loans, net $ 1,357,589 $ 1,392,722
1 Comprised of other revolving credit, installment loans, and overdrafts.
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At June 30, 2021 , total gross loans decreased by $34.0 million , to $1.398
billion , from $1.432 billion at December 31, 2020 . The decrease in loans was
largely attributed to a $18.4 million decrease in total consumer loans, to
$308.8 million at June 30, 2021 , from $327.2 million at December 31, 2020 . The
underlying decreases were comprised of other consumer loans by $20.6 million ,
and automobile by $494 thousand , partially offset by $2.8 million in residential
mortgage. In addition, commercial loans decreased by $15.6 million to $1.09
billion at June 30, 2021 , from $1.10 billion at December 31, 2020 . The
underlying decrease was primarily due to the decreases of $25.9 million in
commercial & industrial loans, and $18.2 million in commercial construction,
partially offset by the increase of $28.5 million in commercial mortgage loans.
In recognition of the potential difficulties that may be faced by our
commercial, real estate and consumer customers due to the COVID-19 pandemic, the
Bank initiated a temporary program in March 2020 under which affected commercial
and consumer customers that may have their loan payments deferred or otherwise
adjusted for a period of up to 90 days. This temporary program ended on June 30,
2020 . The Bank continues to process commercial and consumer deferral requests on
a case-by-case basis.
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 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. In 2020, the Bank approved and funded
over $93.4 million in PPP loans. At June 30, 2021 , the outstanding principal
balance of PPP loans was at $73.6 million . As of August 6, 2021 , a total of
$83.9 million in PPP loans have been forgiven, of which $76.2 million were
forgiven in 2021 and $7.7 million in 2020. On January 13, 2021 , the SBA
re-opened the PPP program and began accepting applications for PPP loans until
the program ended on May 31, 2021 . As of August 6, 2021 , the Bank has approved
and funded over $56.6 million in additional PPP loans in 2021. It is the Bank's
understanding that loans funded through the PPP program are fully guaranteed by
the U.S. government. Should those circumstances change, the Bank could be
required to establish an additional allowance for loan loss through additional
credit loss expense charged to earnings.
At
Since it first opened in 1972, the Bank has expanded its operations and its branch network, first inGuam , then in the other islands of our region and inSan Francisco, California . In the interests of enhancing performance and stability through market and industry diversification, the Bank has increased its focus on growth in theSan Francisco area in recent years, adding personnel with experience and expertise in theBay Area . The following table provides figures for gross loans in the Bank's administrative regions forJune 30, 2021 , andDecember 31, 2020 : June 30, 2021 December 31, 2020 Guam$ 743,383 $ 775,687
Commonwealth of the
145,150
The Freely Associated States of
92,901
California $ 428,035 $ 417,948
Total $ 1,397,674 $ 1,431,686
* 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 decreased by 2.38% during the six months endedJune 30, 2021 . By way of comparison, loans inGuam decreased by$32.3 million , or 4.2%, during the six months endedJune 30, 2021 . Loans in the Commonwealth of theNorthern Mariana Islands decreased by$5.9 million , or 4.0%, and the Freely Associated States ofMicronesia decreased by$5.9 million , or 6.4%, during the same period. In theCalifornia region loans increased by$10.1 million , or 2.4%, during the six months endedJune 30, 2021 , as theCalifornia region provided continued support for the expansion of the Bank.
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$751.4 million in unrestricted interest-earning deposits with financial institutions atJune 30, 2021 , an increase of$506.7 million , or 207.0%, from the$244.8 million in such deposits atDecember 31, 2020 . This significant increase is the result of the various funds received by depositors from the CARES Act, which were held in cash balances with theFederal Reserve Bank at the end of the reporting period. FromDecember 31, 2020 , toJune 30, 2021 , the Bank's combined investment portfolio increased by$103.9 million , or 18.7%, from$556.7 million to$660.6 million . The growth in the investment portfolio was comprised of a$106.9 million increase in our holdings of held-to-maturity securities, which increased by 229.5%, from$46.6 million to$153.5 million , partially offset by a$3.0 million decrease in available-for-sale securities securities, which decreased by 0.6%, from$510.1 million to$507.1 million . The increase in the held-to-maturity portfolio was a result of a classification transfer totaling$130.5 million onApril 30, 2021 from the available-for-sale portfolio. This 42 -------------------------------------------------------------------------------- transfer was done to mitigate the risk to the quarterly market valuation on the available-for-sale portfolio when rates rise. Management believes that the Bank maintains an adequate level of liquidity.
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, 2021 December 31, 2020
Non-accrual loans:
Commercial & industrial $ 7,645 $ 8,750
Commercial mortgage 37,998 6,618
Residential mortgage 1,978 2,575
Other consumer 1 182 196
Total non-accrual loans 47,803 18,139
Loans past due 90 days and still accruing:
Commercial & industrial 125 387
Commercial mortgage 564 471
Residential mortgage 140 129
Automobile - 43
Other consumer1 931 1,097
Total loans past due 90 days and still accruing 1,760 2,127
Total nonperforming loans 49,563
20,266
Other real estate owned (OREO): Commercial real estate - - Residential real estate - - Total other real estate owned - - Total nonperforming assets $ 49,563 $ 20,266 Restructured loans: Accruing loans $ 13,897 $ 15,937 Non-accruing loans (included in nonaccrual loans above) 35,079 4,718 Total restructured loans $ 48,976 $ 20,655 1 Comprised of other revolving credit, installment loans, and overdrafts. The above table indicates that nonperforming loans increased by$29.3 million during the six months endedJune 30, 2021 , which resulted from the increase in total non-accrual loans by$29.7 million , from$18.1 million to$47.8 million . The increases in total non-accrual loans were due to the increases of$31.4 million in commercial mortgage, partially offset by decreases of$1.1 million in commercial & industrial loans, and$597 thousand in residential mortgage loans. In addition, total loans past due 90 days and still accruing decreased by$367 thousand from$2.1 million to$1.8 million . The decreases were$262 thousand in commercial & industrial loans, and$166 thousand in other consumer loans. These were partially offset by the increase of$93 thousand in commercial mortgage loans. 43
-------------------------------------------------------------------------------- AtJune 30, 2021 , the Bank's largest nonperforming loans are four commercial mortgage loans totaling$34.4 million from four relationships of$28.9 million ,$3.2 million $1.3 million and$1.0 million , respectively, and one commercial & industrial loan relationship totaling$7.6 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.
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
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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, 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
Balance at end of period $ 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
Six Months Ended June 30, 2020
Allowance for loan losses:
Balance at beginning of period $ 18,360 $ 1,490 $ 8,020 $ 27,870
Charge-offs (484 ) - (2,045 ) (2,529 )
Recoveries 166 - 770 936
Provision 2,259 381 1,967 4,607
Ending balance $ 20,301 $ 1,871 $ 8,712 $ 30,884
Allowance balance at end of period
related to:
Loans individually evaluated for
impairment $ 4,391 $ 2 $ 901 $ 5,294
Loans collectively evaluated for
impairment 15,910 1,869 7,811 25,590
Ending balance $ 20,301 $ 1,871 $ 8,712 $ 30,884
Loan balances at end of period:
Loans individually evaluated for
impairment $ 32,867 $ 4,183 $ 984 $ 38,034
Loans collectively evaluated for
impairment 1,016,962 122,250 218,411 1,357,623
Ending balance $ 1,049,829 $ 126,433 $ 219,395 $ 1,395,657
Year Ended December 31, 2020
Allowance for loan losses:
Balance at beginning of year $ 18,360 $ 1,490 $ 8,020 $ 27,870
Charge-offs (1,069 ) - (4,559 ) (5,628 )
Recoveries 399 - 1,806 2,205
Provision 3,523 500 6,335 10,358
Ending balance $ 21,213 $ 1,990 $ 11,602 $ 34,805
Allowance balance at end of year related
to:
Loans individually evaluated for
impairment $ 3,500 $ 4 $ 1,264 $ 4,768
Loans collectively evaluated for
impairment 17,713 1,986 10,338 30,037
Ending balance $ 21,213 $ 1,990 $ 11,602 $ 34,805
Loan balances at end of year:
Loans individually evaluated for
impairment $ 36,031 $ 2,730 $ 1,343 $ 40,104
Loans collectively evaluated for
impairment 1,068,463 126,717 196,402 1,391,582
Ending balance $ 1,104,494 $ 129,447 $ 197,745 $ 1,431,686 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 one significant borrowing relationship in bankruptcy totaling $7.6
million at June 30, 2021 . The Bank has calculated a specific reserve within the
allowance for this borrowing relationship in bankruptcy in the amount of $3.5
million , and believes it has sufficient collateral for the reamaining amount. As
a result, the Bank's management believes at June 30, 2021 , there is sufficient
coverage to protect the Bank's exposure to this relationship.
Total Cash and Cash Equivalents
Total cash and cash equivalents were$793.4 million and$287.6 million atJune 30, 2021 , andDecember 31, 2020 , respectively. This significant increase is the result of the various funds received from the CARES Act, largely from the Amercian Rescue Plan Act totaling$356.9 million , which were held in cash balances with theFederal Reserve Bank at the end of the reporting period. 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, 2021 December 31, 2020 Variance
Cash and due from banks $ 41,947 $ 42,875 $ (928 )
Interest-bearing deposits with financial
institutions 751,421 244,753 506,668
Total cash and cash equivalents $ 793,368 $ 287,628 $ 505,740
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, 2021 , the carrying value of the investment securities portfolio
(excluding ASC Trust LLC stock and Federal Home Loan Bank stock) totaled $660.6
million , which represents a $103.9 million increase from the portfolio balance
of $556.7 million at December 31, 2020 . 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, 2021 , and December 31, 2020 :
June 30, 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
6 (114 ) 24,128
U.S. government agency or GSE
residential
mortgage-backed securities 232,969 3,292 (211 ) 236,050
Total $ 512,092 $ 3,298 $ (8,327 ) $ 507,063
Securities Held-to-Maturity
U.S. government agency and government
sponsored
enterprise (GSE) debt securities
13 (34 ) 3,887
U.S. government agency or GSE
residential
mortgage-backed securities 6,532 165 (21 ) 6,676
Total $ 153,496 $ 611 $ (544 ) $ 153,563
December 31, 2020
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
29 (206 ) 28,606
U.S. government agency or GSE
residential
mortgage-backed securities 176,912 6,447 - 183,359
Total $ 506,135 $ 6,530 $ (2,554 ) $ 510,111
Securities Held-to-Maturity
U.S. government agency and government
sponsored
enterprise (GSE) debt securities
15 (36 ) 4,494
U.S. government agency or GSE
residential
mortgage-backed securities 8,848 280 (10 ) 9,118
Total $ 46,584 $ 388 $ (61 ) $ 46,911
At June 30, 2021 , and December 31, 2020 , investment securities with a carrying
value of $542.8 million and $360.6 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, 2021
Available-for-Sale Held-to-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Due within one year $ 7 $ 7 $ - $ -
Due after one but within five years 4,447 4,439 1,942 1,970
Due after five but within ten years 179,573 177,008 24,645 24,313
Due after ten years 328,065 325,609 126,909 127,280
Total $ 512,092 $ 507,063 $ 153,496 $ 153,563
December 31, 2020
Available-for-Sale Held-to-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Due within one year $ 5,115 $ 5,121 $ 11,990 $ 12,070
Due after one but within five years 13,255 13,432 2,325 2,358
Due after five but within ten years 129,708 131,340 26,214 26,348
Due after ten years 358,057 360,218 6,055 6,135
Total $ 506,135 $ 510,111 $ 46,584 $ 46,911
48
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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, 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
- $ -$ (8,002 ) $ 246,885 U.S. government agency pool securities (2 ) 625 (112 ) 21,720 (114 ) 22,345U.S. government agency or GSE
residential
mortgage-backed securities (211 ) 84,674 - - (211 ) 84,674 Total$ (8,215 ) $ 332,184 $
(112 )
Securities Held to Maturity US government agency and sponsored Agencies (GSE) debt securities$ (489 ) $ 54,021 $ - $ -$ (489 ) $ 54,021 U.S. government agency pool securities - - (34 ) 2,460 (34 ) 2,460U.S. government agency or GSE
residential
mortgage-backed securities (12 ) 1,411 (9 ) 459 (21 ) 1,870 Total$ (501 ) $ 55,432 $ (43 ) $ 2,919 $ (544 ) $ 58,351 December 31, 2020 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 SaleU.S. government agency and government sponsored enterprise
(GSE) debt securities
- $ -$ (2,348 ) $ 243,089 U.S. government agency pool securities (22 ) 3,735 (184 ) 22,672 (206 ) 26,407 Total$ (2,370 ) $ 246,824 $ (184 ) $ 22,672 $ (2,554 ) $ 269,496 Securities Held to MaturityU.S. government agency and government sponsored enterprise
(GSE) debt securities
- $ -$ (15 ) $ 14,985 U.S. government agency pool securities - - (36 ) 2,923 (36 ) 2,923U.S. government agency or GSE
residential
mortgage-backed securities (10 ) 506 - - (10 ) 506 Total$ (25 ) $ 15,491 $ (36 ) $ 2,923 $ (61 ) $ 18,414 The Company does not believe that any of the investment securities that were in an unrealized loss position as ofJune 30, 2021 , which included a total of 104 securities, were other-than-temporarily impaired. Specifically, the 104 securities were comprised of 34Small Business Administration Pool securities, 1 mortgage-backed security issued byGovernment National Mortgage Association , 23 agency securities issued byFederal Home Loan Bank (FHLB), 20 agency securities issued by Federal Home Loan Mortgage Corporation (FHLMC), 10 mortgaged-backed securities and 1 agency security issued by Federal National Mortgage Association (FNMA), and 15 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 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. 49
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Deposits
AtJune 30, 2021 , total deposit liabilities increased by$563.7 million from the approximately$2.1 billion atDecember 31, 2020 . Interest-bearing deposits increased by$120.5 million , to$1.47 billion atJune 30, 2021 , compared to$1.35 billion atDecember 31, 2020 , and non-interest bearing deposits increased by$443.2 million , to$1.21 billion atJune 30, 2021 , from$770.0 million atDecember 31, 2020 . The 26.6% increase in total deposits was primarily due to the receipt of funds from various COVID-19 federal relief programs of which$356.9 million is from ARP. The following table sets forth the composition of our interest-bearing deposit portfolio with the balances and average interest rates atJune 30, 2021 , andDecember 31, 2020 , respectively: June 30, 2021 December 31, 2020 Average Average Balance rate Balance rate Interest-bearing checking accounts$ 321,935 0.03 %$ 322,933 0.12 % Savings accounts 797,293 0.03 % 754,042 0.18 % Certificates of deposit 350,090 0.11 %
271,832 0.36 %
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, 2021 , andDecember 31, 2020 : June 30, 2021 December 31, 2020 Guam$ 1,317,230 $ 1,197,656 Commonwealth of the Northern Mariana Islands 796,465
363,875
The Freely Associated States of Micronesia * 520,736 509,817 California 48,151 47,496 Total$ 2,682,582 $ 2,118,844
* The Freely Associated States (FAS) are comprised of the Federated States of
Islands and the
During the six months endedJune 30, 2021 , the Bank's deposits increased by$563.7 million (26.6%) to$2.68 billion compared toDecember 31, 2020 . During this period the increase in our deposits were in ourGuam branches by$119.6 million , CNMI branches by$432.6 million , FAS branches by$10.9 million , and ourCalifornia region by$655 thousand . The significant increase in deposits in these regions is primarily from the various COVID-19 federal relief programs.
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 qulalify 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%. BeginningJuly 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 and David J. 50 -------------------------------------------------------------------------------- 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.
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, 2021 , 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$1.3 billion , up$502.7 million from$797.7 million atDecember 31, 2020 . This increase is comprised of a$506.7 million increase in interest bearing deposits in banks, partially offset by$3.0 million in investment securities available-for-sale. The increase in interest bearing deposits in banks is primarily due to the receipt of$356.9 million in American Resuce Plan Act funds that have yet to be disbursed. Management believes we have sufficient cash to meet the demands of the distribution of funds under the CARES Act. However, we will monitor our vault cash on a daily basis, and if the need arises we will acquire additional cash by drawing down our deposits with other financial institutions, including theFederal Bank of San Francisco .
Contractual Obligations
The Bank utilizes facilities, equipment and land under various operating leases with terms, including renewal options, ranging from 1 to 99 years.
The following table provides the maturities of lease liabilities atJune 30, 2021 : Operating Leases (a) Total 2021$ 1,642 $ 1,642 2022 2,780 2,780 2023 2,532 2,532 2024 2,420 2,420 2025 2,288 2,288 After 2025 35,569 35,569 Total lease payments 47,231 47,231 Less: Interest (b) 21,932 21,932
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 $2.2 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, 2021 and 2020, approximated $205
thousand and $149 thousand , respectively. During the three months ended June 30,
2021 and 2020, lease payments made to these entities approximated $143 thousand
and $89 thousand , respectively
51
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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, 2021 , minimum future rents to be received under non-cancelable
operating sublease agreements were $21 thousand , $38 thousand , and $26 thousand
for the periods ending December 31, 2021 , 2022, and 2023, respectively.
A summary of rental activities for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Rent expense $ 1,015 $ 997 $ 2,040 $ 2,001
Total rent expense $ 1,015 $ 997 $ 2,040 $ 2,001 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, 2021 December 31, 2020
Commitments to extend credit $ 174,473 $ 159,405
Letters of credit:
Standby letters of credit $ 55,633 $ 52,827
Commercial letters of credit 2,264 2,574
Total $ 57,897 $ 55,401
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, 2021 , the maximum undiscounted future payments that the
Bank could be required to make was $57.9 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 $45
thousand in reserve liabilities associated with commitments to extend credit and
letters of credit at June 30, 2021 .
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 $188.3 million and $186.9
million at June 30, 2021 , and December 31, 2020 , respectively. At June 30, 2021 ,
and December 31, 2020 , the Bank recorded mortgage servicing rights of $1.9
million and $1.7 million , respectively.
Capital Resources
The Company and the Bank are subject to various regulatory capital requirements administered bythe 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 52
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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.
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 ofJune 30, 2021 , andDecember 31, 2020 , the Bank met all capital adequacy requirements to which it is subject. As ofJune 30, 2021 , the Bank's capital ratios each exceeded theFederal 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 recentFDIC 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, 2021 :
Total capital (to Risk
Weighted Assets) $ 233,763 16.056 % $ 116,476 8.000 % $ 145,594 10.000 %
Tier 1 capital (to Risk
Weighted Assets) $ 180,342 12.387 % $ 87,357 6.000 % $ 116,476 8.000 %
Tier 1 capital (to Average
Assets) $ 180,342 6.277 % $ 114,931 4.000 % $ 143,664 5.000 %
Common Equity Tier 1
Capital (to Risk Weighted
Assets) $ 170,560 11.715 % $ 65,518 4.500 % $ 94,636 6.500 %
At December 31, 2020 :
Total capital (to Risk
Weighted Assets) $ 206,381 14.307 % $ 115,401 8.000 % $ 144,252 10.000 %
Tier 1 capital (to Risk
Weighted Assets) $ 173,141 12.003 % $ 86,551 6.000 % $ 115,401 8.000 %
Tier 1 capital (to Average
Assets) $ 173,141 7.466 % $ 92,765 4.000 % $ 115,956 5.000 %
Common Equity Tier 1
Capital (to Risk Weighted
Assets) $ 163,359 11.325 % $ 64,913 4.500 % $ 93,764 6.500 %
Since the formation of BankGuam Holding Company in 2011, our assets have grown
by 165.6% ($1.8 billion ), while our stockholders' equity has increased by 89.9%
(79.8 million, including $72.7 million in retained earnings). The growth in
equity has helped to increase our capital ratios, and those ratios remain well
above the well capitalized standards.
The Bank continues to receive a large influx of deposits from federal relief
programs due to the COVID-19 pandemic, which largely increased its total cash
and cash equivalents on its balance sheet resulting in an increase in its
average assets in June 30, 2021 by approximately $554.2 million to $2.87 billion
from $2.31 billion in December 31, 2020 . This growth resulted in an adverse
impact 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.
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. 53 -------------------------------------------------------------------------------- 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.
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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