UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2022

or

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

For the transition period from            to            .

Commission file number: 000-54483

BankGuam Holding Company

(Exact name of registrant as specified in its charter)

Guam	66-0770448
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

P.O. Box BW

Hagåtña, Guam 96932

(671) 472-5300

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.2083 par value per share	“BKGM”	Not listed

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of August 11, 2022, there were 9,727,743 shares outstanding

BANKGUAM HOLDING COMPANY

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

PART 1. FINANCIAL INFORMATION		3
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Statements of Financial Condition at June 30, 2022 and December 31, 2021	3
	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and 2021	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021	6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 4.	Controls and Procedures	54
PART II. OTHER INFORMATION		55
Item 6.	Exhibits	55
Signatures		56

Cautionary Note Regarding Forward-Looking Statements

For purposes of this Quarterly Report, the terms the “Company,” “we,” “us” and “our” refer to BankGuam Holding Company and its subsidiaries. This Quarterly Report on Form 10-Q contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be preceded by, followed by or include the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “is designed to” and similar expressions as well as other statements regarding our future operations, financial condition and prospects, and business strategies. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about our business that could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. We are not able to predict all of the factors that may affect future results. These include, among other things, the following risks:

• Competition for loans and deposits and failure to attract or retain deposits and loans;

• Local, regional, national and global economic conditions, and the impact they may have on us and our customers, and our assessment of that impact on our estimates, including the allowance for loan losses and fair value measurements;

• The effects of the COVID-19 pandemic, including reduced tourism in Guam, volatility in the international and national economy and credit markets, quarantines or other travel or health-related restrictions, the length and severity of the COVID-19 pandemic and the pace of recovery following the COVID-19 pandemic;

• Risks associated with concentrations in real estate related loans;

• Changes in the level of nonperforming assets and charge-offs and other credit quality measures, and their impact on the adequacy of our allowance for loan losses and our provision for loan losses;

• The effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”); and the anticipated elimination of the London Interbank Offered Rate (“LIBOR”) as a benchmark interest rate;

• Stability of funding sources and continued availability of borrowings;

• The effect of changes in laws and regulations with which the Company and Bank of Guam must comply, including any change in Federal Deposit Insurance Corporation insurance premiums;

• Our ability to raise capital or incur debt on reasonable terms;

• Regulatory limits on Bank of Guam’s ability to pay dividends to the Company;

• The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;

• Changes in the deferred tax asset valuation allowance in future quarters;

• The costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews;

• Our ability to increase market share and control expenses;

• Any interruption or security breach of our information systems, or the information systems of our third party service providers, resulting in failures or disruptions in customer services or confidentiality; and

• Our success in managing the risks involved in the foregoing items.

Other factors that might cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” included in filings we make from time to time with the U.S. Securities and Exchange Commission (“SEC”), including our Quarterly Reports on Form 10-Q to be filed by us in our fiscal year ending December 31, 2022. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. New information, future events or risks could cause the forward-looking events we discuss in this Quarterly Report not to occur. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Quarterly Report.

2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

BankGuam Holding Company

Unaudited Condensed Consolidated Statements of Financial Condition

(in Thousands, Except Par Value)

	June 30, 2022			December 31, 2021
ASSETS
Cash and due from banks	$	38,529		$	36,660
Interest bearing deposits in banks		286,911			520,743
Total cash and cash equivalents		325,440			557,403
Restricted cash		150			150
Investment securities available-for-sale, at fair value		540,595			499,366
Investment securities held-to-maturity, at amortized cost    (Fair Value $261,694 at 6/30/2022 and $310,372 at 12/31/2021)		318,726			312,294
Federal Home Loan Bank stock, at cost		3,318			2,814
Loans, net of allowance for loan losses    ($35,732 at 6/30/2022 and $34,408 at 12/31/2021)		1,321,504			1,283,690
Accrued interest receivable		6,670			6,715
Premises and equipment, net		20,534			20,802
Goodwill		13,014			13,014
Intangible assets		10,350			10,720
Other assets		114,546			84,620
Total assets	$	2,674,847		$	2,791,588
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	921,264		$	981,537
Interest bearing		1,526,542			1,551,694
Total deposits		2,447,806			2,533,231
Accrued interest payable		31			46
Subordinated debt, net		34,434			34,400
Other liabilities		48,304			43,162
Total liabilities		2,530,575			2,610,839
Commitments and contingencies (Note 6)
Stockholders’ equity:
Common stock $0.2083 par value; 48,000 shares authorized; 9,777 and  9,770    shares issued and 9,728 and 9,721 shares outstanding at 6/30/2022 and    12/31/2021, respectively		2,034			2,033
Preferred stock $100 par value; 300 shares authorized; 9.8 shares issued    and outstanding at 6/30/2022 and 12/31/2021, respectively		980			980
Additional paid-in capital, Common stock		24,989			24,910
Additional paid-in capital, Preferred stock		8,803			8,803
Retained earnings		158,722			153,740
Accumulated other comprehensive (loss) income		(58,217	)		(16,721	)
Non-controlling interest		7,251			7,294
Common stock in treasury, at cost (32 shares)		(290	)		(290	)
Total stockholders’ equity		144,272			180,749
Total liabilities and stockholders’ equity	$	2,674,847		$	2,791,588

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

BankGuam Holding Company

Unaudited Condensed Consolidated Statements of Income

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Interest income:
Loans	$	17,732		$	17,645		$	35,367		$	35,892
Investment securities		3,408			2,400			6,583			4,599
Deposits with banks		710			148			889			215
Total interest income		21,850			20,193			42,839			40,706
Interest expense:
Savings deposits		38			112			77			214
Time deposits		4			8			8			20
Other borrowed funds		476			238			941			476
Total interest expense		518			358			1,026			710
Net interest income		21,332			19,835			41,813			39,996
Provision for loan losses		1,425			475			2,850			2,950
Net interest income, after provision for loan losses		19,907			19,360			38,963			37,046
Non-interest income:
Service charges and fees		5,099			1,836			10,552			3,506
Gain on sale of investment securities		-			-			-			272
Income from merchant services, net		891			758			1,543			1,406
Cardholders income, net		985			991			1,538			1,245
Trustee fees		729			149			815			301
Other income		822			1,741			1,471			2,955
Total non-interest income		8,526			5,475			15,919			9,685
Non-interest expense:
Salaries and employee benefits		9,616			8,004			18,841			16,700
Occupancy		2,443			2,132			4,664			4,261
Technology, equipment and depreciation		5,347			3,083			10,668			6,024
Insurance		466			515			923			1,005
Telecommunications		405			389			855			756
FDIC assessment		296			516			618			860
Professional services		804			627			1,607			1,192
Contract services		471			719			919			1,340
Other real estate owned		12			13			25			27
Stationery and supplies		161			(48	)		330			73
Training and education		307			40			567			84
General, administrative and other		2,978			1,399			5,409			2,939
Total non-interest expense		23,306			17,389			45,426			35,261
Income before income taxes		5,127			7,446			9,456			11,470
Income tax expense		998			1,536			1,813			2,265
Net income		4,129			5,910			7,643			9,205
Net income attributable to noncontrolling interest		220			-			467			-
Net income available to BankGuam Holding Company		3,909			5,910			7,176			9,205
Preferred stock dividend		(123	)		(136	)		(245	)		(271	)
Net income attributable to common stockholders	$	3,786		$	5,774		$	6,931		$	8,934
Earnings per common share (EPS):					-						-
Basic and diluted EPS	$	0.39		$	0.59		$	0.71		$	0.92
Dividends declared per common share	$	0.10		$	0.10		$	0.20		$	0.20
Basic and diluted weighted average common shares		9,728			9,715			9,724			9,710

The accompanying notes are an integral part of the condensed consolidated financial statements.

4

BankGuam Holding Company

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(in Thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2022			2021		2022			2021
Net income	$	4,129		$	5,910	$	7,643		$	9,205
Other comprehensive income (loss):
Unrealized holding gain (loss) on available-for-sale    securities arising during the period, net of tax		(16,381	)		4,898		(41,926	)		(15,590	)
Reclassification for (gain) realized on available-for-    sale securities		-			-		-			(272	)
Amortization of post-transfer unrealized holding loss on    held-to-maturity securities during the period, net of tax		215			88		430			113
Total other comprehensive income (loss)		(16,166	)		4,986		(41,496	)		(15,749	)
Total comprehensive income (loss)	$	(12,037	)	$	10,896	$	(33,853	)	$	(6,544	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

BankGuam Holding Company

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(Dollar Amounts and Number of Shares in Thousands)

	Number of Common Shares		Common Stock		Preferred Stock		Additional Paid-in Capital - Common		Additional Paid-in Capital - Preferred		Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Noncontrolling Interests			Total
Balances, January 1, 2022		9,721	$	2,033	$	980	$	24,910	$	8,803	$	153,740		$	(16,721	)	$	(290	)	$	7,294		$	180,749
Net income		-		-		-		-		-		3,267			-			-			247			3,514
Change in accumulated other comprehensive income:
Unrealized loss on available-for-sale securities, net		-		-		-		-		-		-			(25,330	)		-			-			(25,330	)
Common stock issued under Employee Stock    Purchase Plan & Service Awards		7		1		-		79		-		-			-			-			-			80
Return of capital from stocks owned by subsidiary		-		-		-		-		-		-			-			-			(8	)		(8	)
Cash dividends on common stock		-		-		-		-		-		(974	)		-			-			(219	)		(1,193	)
Cash dividends on preferred stock		-		-		-		-		-		(122	)		-			-			-			(122	)
Balances, March 31, 2022		9,728	$	2,034	$	980	$	24,989	$	8,803	$	155,911		$	(42,051	)	$	(290	)	$	7,314		$	157,690
Net income		-		-		-		-		-		3,909			-			-			220			4,129
Change in accumulated other comprehensive income:																					-
Unrealized gain on available-for-sale securities, net		-		-		-		-		-		-			(16,166	)		-			-			(16,166	)
Return of capital from stocks owned by subsidiary																					(52	)		(52	)
Cash dividends on common stock		-		-		-		-		-		(975	)		-			-			(231	)		(1,206	)
Cash dividends on preferred stock		-		-		-		-		-		(123	)		-			-			-			(123	)
Balances, June 30, 2022		9,728	$	2,034	$	980	$	24,989	$	8,803	$	158,722		$	(58,217	)	$	(290	)	$	7,251		$	144,272
	Number of Common Shares		Common Stock		Preferred Stock		Additional Paid-in Capital - Common		Additional Paid-in Capital - Preferred		Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Noncontrolling Interests			Total
Balances, January 1, 2021		9,702	$	2,029	$	980	$	24,777	$	8,803	$	137,646		$	3,111		$	(290	)	$	-		$	177,056
Net income		-		-		-		-		-		3,295			-			-			-			3,295
Change in accumulated other comprehensive income:
Unrealized gain on available-for-sale securities, net		-		-		-		-		-		-			(20,735	)		-			-			(20,735	)
Common stock issued under Employee Stock    Purchase Plan & Service Awards		12		2		-		95		-		-			-			-			-			97
Cash dividends on common stock		-		-		-		-		-		(970	)		-			-			-			(970	)
Cash dividends on preferred stock		-		-		-		-		-		(135	)		-			-			-			(135	)
Balances, March 31, 2021		9,714	$	2,031	$	980	$	24,872	$	8,803	$	139,836		$	(17,624	)	$	(290	)	$	-		$	158,608
Net income		-		-		-		-		-		5,910			-			-			-			5,910
Change in accumulated other comprehensive income:
Unrealized loss on available-for-sale securities, net		-		-		-		-		-		-			4,986			-			-			4,986
Common stock issued under Employee Stock    Purchase Plan & Service Awards		9		2		-		89		-		-			-			-			-			91
Cash dividends on common stock		-		-		-		-		-		(972	)		-			-			-			(972	)
Cash dividends on preferred stock		-		-		-		-		-		(136	)		-			-			-			(136	)
Balances, June 30, 2021		9,723	$	2,033	$	980	$	24,961	$	8,803	$	144,638		$	(12,638	)	$	(290	)	$	-		$	168,487

The accompanying notes are an integral part of the condensed consolidated financial statements.

6

BankGuam Holding Company

Unaudited Condensed Consolidated Statements of Cash Flows

(in Thousands)

	Six Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net income	$	7,643		$	9,205
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		2,850			2,950
Depreciation		2,839			2,065
Amortization of debt issuance costs		34			13
Amortization of fees, discounts and premiums		35			219
Proceeds from sales of loans held for sale		4,888			17,915
Origination of loans held for sale		(4,888	)		(17,915	)
Decrease (increase) in mortgage servicing rights		30			(190	)
Gross realized gains on sale of available-for-sale securities		-			(272	)
Realized loss on sale of premises and equipment		91			6
Noncash lease expense		(5,058	)		1,463
Increase in deferred tax asset		(12,181	)		(2,275	)
Net change in operating assets and liabilities:
Accrued interest receivable		45			783
Other assets		(12,808	)		(1,899	)
Accrued interest payable		(15	)		(19	)
Lease liability		5,054			(1,323	)
Other liabilities		75			3,700
Net cash (used in) provided by operating activities		(11,366	)		14,426
Cash flows from investing activities:
Purchases of available-for-sale securities		(128,253	)		(223,497	)
Purchases of held-to-maturity securities		(9,645	)		-
Proceeds from sales of available-for-sale securities		-			46,993
Maturities, prepayments and calls of available-for-sale securities		45,036			33,321
Maturities, prepayments and calls of held-to-maturity securities		3,610			23,623
Loan originations and principal collections, net		(40,651	)		32,183
Income from equity investment in unconsolidated subsidiary		-			(1,180	)
Dividends received from unconsolidated subsidiary		-			1,154
Purchase of FHLB stock		(504	)		(479	)
Proceeds from sales of premises and equipment		-			8
Purchases of premises and equipment		(2,201	)		(2,480	)
Net cash used in investing activities		(132,608	)		(90,354	)
Cash flows from financing activities:
Net (decrease) increase in deposits		(85,425	)		563,738
Proceeds from issuance of subordinated debt, net		-			19,955
Proceeds from issuance of common stock		80			188
Dividends paid		(2,644	)		(2,213	)
Net cash (used in) provided by financing activities		(87,989	)		581,668
Net change in cash, cash equivalents and restricted cash		(231,963	)		505,740
Cash, cash equivalents and restricted cash at beginning of period		557,553			287,778
Cash, cash equivalents and restricted cash at end of period	$	325,590		$	793,518
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	54		$	176
Income taxes	$	1,042		$	3,220
Supplemental disclosure of noncash investing and financing activities:
Net change in unrealized loss on held-to-maturity securities, net of tax	$	430		$	113
Net change in unrealized gain on available-for-sale securities, net of tax	$	(41,927	)	$	(15,862	)
Transfer of securities from available-for-sale securities	$	-		$	130,471
Transfer of securities to held-to-maturity securities	$	-		$	(130,471	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

7

BankGuam Holding Company

Notes to Condensed Consolidated Financial Statements

(in Thousands, Except Per Share Data)

(Unaudited)

Note 1 – Nature of Business

Organization

The accompanying condensed consolidated financial statements include the accounts of BankGuam Holding Company (“Company”) and its wholly-owned subsidiaries, Bank of Guam (“Bank”) and BankGuam Investment Services (“BGIS”). The Company is a Guam corporation organized on October 29, 2010, to act as the holding company of the Bank, a Guam banking corporation, a 17-branch bank serving the communities in Guam, the Commonwealth of the Northern Mariana Islands (“CNMI”), the Federated States of Micronesia (“FSM”), the Republic of the Marshall Islands (“RMI”), the Republic of Palau (“ROP”), and San Francisco, California. BGIS was incorporated in Guam in 2015 and initially capitalized during the first quarter of 2016. During July 2016, the Company executed an agreement to purchase up to 70% of ASC Trust LLC, formerly ASC Trust Corporation. On July 6, 2021, the Company completed its final purchase of 25% of the voting common stock of ASC Trust LLC under the agreement, as amended to date, bringing the Company’s ownership of ASC Trust LLC to 70%. See Note 4 under “Investment in AST Trust LLC” for additional details.

Other than holding the shares of the Bank, BGIS and ASC Trust LLC, the Company conducts no significant activities, although it is authorized, with the prior approval of its principal regulator, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), to engage in a variety of activities related to the business of banking. Currently, substantially all of the Company’s operations are conducted and substantially all of the assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses and operating income. The Bank provides a variety of financial services to individuals, businesses and governments through its branches. The Bank’s headquarters is located in Hagåtña, Guam. The Bank currently has seven branches in Guam, three in the CNMI, four in the FSM, one in the RMI, one in the ROP, and one in San Francisco, California. The Bank’s primary deposit products are demand deposits, savings and time certificate accounts, and its primary lending products are consumer, commercial and real estate loans. In 2021 the Bank permanently closed the Dededo, Harmon and Chalan Piao branches.  

For ease of reference we will sometimes refer to the Company and the Bank as “we”, “us” or “our”.

Note 2 – Summary of Significant Accounting Policies and Recent Accounting Pronouncements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes that would be required for a full presentation of financial condition, results of operations, changes in cash flows and comprehensive income in accordance with generally accepted accounting principles in the United States (“GAAP”). However, these interim financial statements reflect all adjustments (consisting of normal recurring adjustments and accruals) which, in the opinion of our management, are necessary for a fair presentation of our financial condition, results of operations and cash flows for the interim periods presented.

These unaudited condensed consolidated financial statements have been prepared on a basis consistent with prior periods, and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2021, and the notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the U.S. Securities and Exchange Commission (“SEC”) under the Exchange Act on March 28, 2022. Certain prior period amounts have been reclassified to conform to the current period presentation.

Our condensed consolidated financial condition at June 30, 2022, and the condensed consolidated results of operations for the three and six months ended June 30, 2022, are not necessarily indicative of what our financial condition will be at December 31, 2022, or of the results of our operations that may be expected for the full year ending December 31, 2022.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of income and expenses during the periods presented. Actual results could differ from those estimates.

Restricted Cash

Interest-bearing deposits in banks that mature within one year are carried at cost. $150 thousand of these deposits are held by the Bank jointly under the names of Bank of Guam and the Guam Insurance Commissioner, and serve as a bond for the Bank of Guam Trust Department.

8

COVID-19

The outbreak of a novel coronavirus (“COVID-19”) in 2020 and subsequent impact on public commerce and related business activities continues to impact the Company as well as a broad range of industries in which the Company’s customers operate and, in some instances, impaired their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal 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% on March 16, 2020. Improvements in economic conditions as well as accelerating inflations resulted in the FOMC increasing the target range by 25bps to 0.25% - 0.50% on March 16, 2022, 50bps to 0.75% - 1.00% on May 4, 2022, 75bps to 1.50% - 1.75% on June 15, 2022, and by 75bps 2.25% to 2.50% on July 27, 2022.   

In the United States, the government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The CARES Act, among other things, created a $670 billion loan program (the “Paycheck Protection Program” or the “PPP”) for fully guaranteed loans (which may be forgiven) to small businesses for certain qualifying expenses. The PPP was modified and extended multiple times prior to its expiration on May 31, 2021.

Currently one branch in Guam remains closed due to renovations, and will reopen upon completion. The Bank continues to provide a secure telecommuting program for those personnel who are able to perform their responsibilities remotely, the computer hardware and software needed to support those tasks, and established teleconferencing capabilities to reduce the number of people in attendance at all of its larger group meetings. The Company has not materially changed its accounting policies or procedures due to COVID-19.

Russia/Ukraine Conflict

The current Russia and Ukraine conflict has raised economic and financial market concerns causing uncertainty and disruption in financial markets globally and further straining an already struggling global supply chain. Furthermore, such events have the potential to adversely impact the availability of commodities, commodity prices, and create global inflationary pressures. These and other effects of the conflict could have a negative impact on the ability of borrowers to repay their obligations to the Bank, which could impact our reserves for loan losses and have an adverse effect on our results of operations.

Recently Adopted Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (LIBOR) to an alternative reference rate such as Secured Overnight Financing Rate (SOFR). The guidance was effective upon issuance and generally can be applied through December 31, 2022. In December 2021, the Company adopted SOFR as a replacement to LIBOR. The Company did not originate loans in 2022 indexed to LIBOR nor enter into modifications which create new LIBOR exposure. The Company believes the adoption of this guidance will not have a material impact on the consolidated financial statements.

Recently Issued but Not Yet Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)”, to amend the standards for the measurement of credit losses on financial instruments by replacing the historical incurred loss impairment methodology of determining the level of the allowance for loan and lease losses (“ALLL”), including losses associated with available-for-sale securities, with a more decision-useful methodology that reflects expected credit losses over the life of a financial instrument based upon historical experience, current conditions, and reasonable and supportable forecasts in determining the ALLL level, as well as the reserve for off-balance-sheet credit exposures. The Company was preparing to implement ASU 2016-13 when it was scheduled to become effective January 1, 2020, but the FASB announced on October 16, 2019, a delay of the effective date for smaller reporting companies until January 1, 2023. The Company continues to evaluate the impact the new guidance will have on its financial position, results of operations and regulatory risk-based capital. The Company’s current planned approach for estimating lifetime credit losses for its loan portfolio includes the following key components:

•          An economic forecast period of two years based on the relation of losses with key economic variables for each portfolio  segment;

•          Segmentation of loans into pools that share common risk characteristics; and

•          Used the discounted cash flow (DCF) method to measure credit impairment on most of our loan portfolios and estimate

  lifetime credit losses using the conceptual components described above.

Management will recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude of the adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.

9

The Company classifies its investment securities as available-for-sale or held-to-maturity. The Company’s investment security portfolio consists of U.S. government-sponsored agencies securities, which has an explicit or implicit guarantee from the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Accordingly, the Company does not anticipate to apply a loss assumption for its investment securities.

Note 3 – Earnings Per Common Share

Basic earnings per common share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Potential common shares that may be issued by the Company relate to shares subscribed but not yet issued in 2022 and 2021 under the Employee Stock Purchase Plan, and are reported as dilutive options. No shares were subscribed but not issued at June 30, 2022 and 2021. In April 2022, the Company suspended the Employee Stock Purchase Plan indefinitely in connection with the Company’s plans to implement a 1-for-500 reverse stock split. On July 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.

Earnings per common share are computed based on reported net income, preferred stock dividends and the following common share data:

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Net income available to BankGuam Holding Company	$	3,909		$	5,910		$	7,176		$	9,205
Less preferred stock dividends		(123	)		(136	)		(245	)		(271	)
Net income attributable to common stockholders	$	3,786		$	5,774		$	6,931		$	8,934
Weighted average number of common shares    outstanding - used to calculate basic and diluted    earnings per common share		9,728			9,715			9,724			9,710
Earnings per common share (EPS):
Basic and diluted EPS	$	0.39		$	0.59		$	0.71		$	0.92

10

Note 4 – Investment Securities

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

	June 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities Available-for-Sale
U.S. government agency and government sponsored    enterprise (GSE) debt securities	$	114,971	$	-	$	(16,550	)	$	98,421
U.S. government agency pool securities		66,784		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	$	276,748	$	-	$	(52,572	)	$	224,176
U.S. government agency pool securities		2,143		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
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities Available-for-Sale
U.S. government agency and government sponsored    enterprise (GSE) debt securities	$	114,969	$	-	$	(4,007	)	$	110,962
U.S. government agency pool securities		21,106		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	$	276,188	$	-	$	(1,621	)	$	274,567
U.S. government agency pool securities		3,028		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 to meet other public requirements.

Proceeds and gross realized gains from the sales of available-for-sale investment securities for the six months ended June 30, 2022 and 2021 are shown below. There were no sales of investment securities for the three months ended June 30, 2022  and 2021.

	Six Months Ended June 30,
	2022		2021
Proceeds from sales	$	-	$	46,993
Gross realized gains from sales	$	-	$	272
Gross realized losses from sales	$	-	$	-

11

The amortized cost and estimated fair value of investment securities by contractual maturity at June 30, 2022 and December 31, 2021 are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or borrowers the right to prepay obligations with or without call or prepayment penalties. At June 30, 2022, obligations of U.S. government corporations and agencies with amortized costs totaling $919.6 million consisted of residential mortgage-backed securities totaling $458.9 million and Small Business Administration agency pool securities totaling $68.9 million whose contractual maturity, or principal repayment, will follow the repayment of the underlying small business loans or mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies and SBA pools is categorized based on final maturity date. At June 30, 2022, the Bank estimates the average remaining life of these mortgage-backed securities and SBA pools to be approximately 5.6 years and 5.4 years, respectively.

	June 30, 2022
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated 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 Cost		Estimated Fair Value		Amortized Cost		Estimated 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

12

Temporarily Impaired Securities

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2022 and December 31, 2021.

	June 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities Available-for-Sale
U.S. government agency and government sponsored    enterprise (GSE) debt securities	$	114,971	$	-	$	(16,550	)	$	98,421
U.S. government agency pool securities		66,784		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	$	276,748	$	-	$	(52,572	)	$	224,176
U.S. government agency pool securities		2,143		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
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities Available-for-Sale
U.S. government agency and government sponsored    enterprise (GSE) debt securities	$	114,969	$	-	$	(4,007	)	$	110,962
U.S. government agency pool securities		21,106		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	$	276,188	$	-	$	(1,621	)	$	274,567
U.S. government agency pool securities		3,028		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

The investment securities that were in an unrealized loss position as of June 30, 2022, which comprised a total of 232 securities, were not other-than-temporarily impaired. Specifically, the 232 securities are comprised of the following: 39 Small Business Administration Pool securities,  26 agency securities issued by Federal 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 by Government 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 market interest rates, relative to when the investment securities were purchased, and not due to any change in the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not likely that the Company will be required to sell the investment securities before recovery of their amortized cost, which may be at maturity. However, the Company may elect to sell certain investment securities with an unrealized loss position in its “available for sale” portfolio as needed to replenish its liquidity.

13

Investment in ASC Trust LLC

On July 6, 2021, with the approval of the Federal Reserve Bank of San Francisco, the Company used $6.2 million of the proceeds from the subordinated notes totaling $20 million that were issued on June 29, 2021 to acquire an additional 25% of the voting common stock of ASC Trust LLC at the third and final closing, pursuant to the Stock Purchase Agreement (the “Agreement”) dated May 27, 2016, between the Company and David J. John, as amended to date. This transaction brought the Company’s interest in ASC Trust LLC to 70%. The Company evaluated its ownership in ASC Trust LLC after the last transaction in accordance to ASC 810 – Consolidation, and determined that the Company has control over ASC Trust LLC, requiring consolidation. The Company’s Chief Executive Officer serves on the Board of Directors of ASC Trust LLC. Another of the Company’s Board members also serves as a non-minority voting member of an entity that owns 5% of the common stock of ASC Trust LLC. The Agreement contains customary warranties, representations and indemnification provisions.

Note 5 – Loans Held for Sale, Loans and Allowance for Loan Losses

Loans Held for Sale

In its normal course of business, the Bank originates mortgage loans held for sale to the FHLMC. The Bank has elected to measure its residential mortgage loans held for sale at lower of cost or market. Origination fees and costs are recognized in earnings at the time of origination. Loans are sold to FHLMC at par.

During the six months ended June 30, 2022, the Bank originated and sold $4.9 million in FHLMC mortgage loans. During the six months ended June 30, 2021, the Bank originated and sold $17.9 million in FHLMC loans.

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 at June 30, 2022 and $181.1 million at December 31, 2021. The decrease of $6.4 million (3.52%) during the six months ended June 30, 2022 was due to principal paydowns and payoffs during the period, which offset new loans.

We retain mortgage servicing rights on mortgage loans that we sell. Such rights represent the net positive cash flows generated from the servicing of such mortgage loans and we recognize such rights as assets on our statements of financial condition based on their estimated fair values. We receive servicing fees, less any subservicing costs, on the unpaid principal balances of such mortgage loans. Those fees are collected from the monthly payments made by the mortgagors or from the proceeds of the sale or foreclosure and liquidation of the underlying real property collateralizing the loans. At June 30, 2022 and December 31, 2021, mortgage servicing rights totaled $1.6 million each, respectively, and are included in other assets in the accompanying condensed consolidated statements of financial condition. The Bank accounts for mortgage servicing rights at fair value with changes in fair value recorded as a part of service fees and charges in the condensed consolidated statements of income.

Loans

Outstanding loan balances are presented net of unearned income, deferred loan fees, and unamortized discount and premium totaling $3.0 million at June 30, 2022, and $3.2 million at December 31, 2021. As of June 30, 2022 and December 31, 2021, our 10 largest borrowing relationships in aggregate totaled $342.9 million, respectively, in commitments, or approximately 25.9% of our total gross loans .

14

The loan portfolio consisted of the following at:

	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.

Paycheck Protection Program

With the passage of the Paycheck Protection Program, or PPP, 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 gross PPP loans. At June 30, 2022, the outstanding gross principal balance of PPP loans was $5.3 million with $87 thousand in unearned fees remaining. At loan origination, the Company was paid a fee from the SBA ranging from 1% to 5% based on the loan size. The unearned fees are being accreted to interest income based on the contractual maturity. 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.

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was signed into law which changed key provisions of the PPP, including provisions relating to the maturity of PPP loans, the deferral of PPP loan payments, and the forgiveness of PPP loans. Under the Flexibility Act, as clarified by the SBA in an October 7, 2020 update, the maturity date for PPP loans funded before June 5, 2020 remained at two years from funding while the maturity date for PPP loans funded after June 5, 2020 was five years from funding. In addition, the Flexibility Act increased the period during which PPP loan proceeds are to be used for purposes that would qualify the loan for forgiveness (the “covered period”) from 8 weeks to 24 weeks, at the borrower’s election, for PPP loans made prior to June 5, 2020, and set the covered period for loans made after June 5, 2020 at 24 weeks from funding. Under the Flexibility Act, PPP borrowers are not required to make any payments of principal or interest before the date on which SBA remits the loan forgiveness amount to the Company (or notifies the Company that no loan forgiveness is allowed) and, although PPP borrowers may submit an application for loan forgiveness at any time prior to the maturity date, if PPP borrowers do not submit a loan forgiveness application within 10 months after the end of their covered period, such borrowers will be required to begin paying principal and interest after that period. For loans originated under the SBA's PPP loan program, interest and principal payment on these loans were originally deferred for six months following the funding date, during which time interest would continue to accrue. The Flexibility Act extended the deferral period for borrower payments of principal, interest, and fees on all PPP loans to the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period). The extension of the deferral period under the Flexibility Act automatically applied to all PPP loans.

15

Allowance for Loan Losses

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

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. ASC 310-10 defines an impaired loan as one for which there is uncertainty concerning collection of all principal and interest per the original contractual terms of the loan. For those loans that are classified as impaired, an allowance is established when the discounted cash flow (or the collateral value or the observable market price) of the impaired loan is lower than the carrying value of the loan. The general component covers unimpaired loans, and is estimated using a loss migration analysis based on historical charge-off experience and expected loss, given the default probability derived from the Bank’s internal risk rating process. The loss migration analysis tracks twelve rolling quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans. These calculated loss factors are then applied to outstanding loan balances for all non-impaired loans. Additionally, the allowance consist of internally developed qualitative factors based on interagency guidance which are used to supplement the risks that are not captured by the historical loss migration analysis. These qualitative factors that are determined utilizing external economic factors and internal assessments is applied to each homogeneous loan pool. We also conduct individual loan review analyses, as part of the allowance for loan loss allocation process, applying specific monitoring policies and procedures in analyzing the existing loan portfolio.

Beginning in 2020, management increased the loss attributes in a number of the qualitative factors to more appropriately capture the risks stemming from economic deterioration from COVID-19. The Company continually evaluates these factors and makes adjustments each quarter. During the three and six months ended June 30, 2022, management adjusted the economic risk factors to incorporate the current economic implications, which include fluctuations in tourism, unemployment due to the COVID-19 pandemic and inflationary concerns.

Set forth below is a summary of the Bank’s activity in the allowance for loan losses during the three and six months ended June 30, 2022, and 2021, and the year ended December 31, 2021:

	Three Months Ended June 30, 2022			Three Months Ended June 30, 2021			Six Months Ended June 30, 2022			Six Months Ended June 30, 2021			Year Ended December 31, 2021
Balance, beginning of period	$	35,085		$	36,283		$	34,408		$	34,805		$	34,805
Charged off loans		(1,299	)		(1,160	)		(2,648	)		(2,756	)		(4,950	)
Recoveries on loans previously charged off		521			495			1,122			1,094			2,403
Provision for loan losses		1,425			475			2,850			2,950			2,150
Balance, end of period	$	35,732		$	36,093		$	35,732		$	36,093		$	34,408

16

Set forth below is information regarding loan balances and the related allowance for loan losses, by portfolio type, for the three and six months ended June 30, 2022 and 2021, and the year ended December 31, 2021, respectively.

	Commercial			Residential 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

17

Credit Quality

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

	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Non- Accrual		90 Days and Greater Still Accruing		Total Past Due		Current		Total Loans Outstanding
June 30, 2022
Commercial
Commercial & industrial	$	1,898	$	210	$	6,903	$	106	$	9,117	$	264,272	$	273,389
Commercial mortgage		-		-		5,842		-		5,842		755,541		761,383
Commercial construction		-		-		-		-		-		8,391		8,391
Commercial agriculture		-		-		-		-		-		572		572
Total commercial		1,898		210		12,745		106		14,959		1,028,776		1,043,735
Consumer
Residential mortgage		2,432		2,403		652		4		5,491		139,028		144,519
Home equity		-		-		-		-		-		2,537		2,537
Automobile		278		132		-		55		465		17,294		17,759
Other consumer 1		2,162		923		68		832		3,985		147,677		151,662
Total consumer		4,872		3,458		720		891		9,941		306,536		316,477
Total	$	6,770	$	3,668	$	13,465	$	997	$	24,900	$	1,335,312	$	1,360,212
December 31, 2021
Commercial
Commercial & industrial	$	56	$	202	$	7,338	$	106	$	7,702	$	288,133	$	295,835
Commercial mortgage		2,540		217		4,622		-		7,379		691,890		699,269
Commercial construction		-		-		-		-		-		23,588		23,588
Commercial agriculture		-		-		-		-		-		592		592
Total commercial		2,596		419		11,960		106		15,081		1,004,203		1,019,284
Consumer
Residential mortgage		2,194		1,236		267		77		3,774		131,603		135,377
Home equity		-		-		-		-		-		2,232		2,232
Automobile		407		162		-		41		610		17,610		18,220
Other consumer 1		2,037		1,024		69		866		3,996		142,212		146,208
Total consumer		4,638		2,422		336		984		8,380		293,657		302,037
Total	$	7,234	$	2,841	$	12,296	$	1,090	$	23,461	$	1,297,860	$	1,321,321

¹ Comprised of other revolving credit, installment loans, and overdrafts.

Generally, the accrual of interest on a loan is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and is in the process of collection, with the exception of automobile and other consumer loans which, rather than being placed on non-accrual status, are charged off once they become 120 days delinquent. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status when in receipt of six consecutive payments, and principal and interest become current and full repayment is expected.

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The following table provides information as of June 30, 2022 and December 31, 2021, with respect to loans on non-accrual status, by portfolio type:

	June 30, 2022		December 31, 2021
	(Dollars in thousands)
Non-accrual loans:
Commercial
Commercial & industrial	$	7,229	$	7,610
Commercial mortgage		7,071		8,148
Total commercial		14,300		15,758
Consumer
Residential mortgage	$	1,760	$	1,660
Other consumer 1		142		152
Total consumer		1,902		1,812
Total non-accrual loans	$	16,202	$	17,570

¹ Comprised of other revolving credit, installment loans, and overdrafts.

Credit Quality Indicators

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

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

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

Pass (B): Standard: Multiple, strong sources of repayment. These are loans to borrowers with a demonstrated history of financial and managerial performance. The risk of loss is considered to be low. Loans are well-structured, with clearly identified primary and readily available secondary sources of repayment. These loans may be secured by an equal amount of funds in a savings account or time certificate of deposit. These loans may also be secured by marketable collateral whose value can be reasonably determined through outside appraisals. The borrower characteristically has well supported cash flows and low leverage.

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

Pass (D): Monitor: Sufficient primary sources of repayment and an acceptable secondary source of repayment. Acceptable business or individual credit, but the borrower’s operations, cash flows or financial conditions carry average levels of risk. These loans are considered to be collectable in full, but may require a greater-than-average amount of loan officer monitoring. Borrowers are capable of absorbing normal setbacks without failing to meet the terms of the loan agreement.

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

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

Formula Classified: Formula Classified loans are all loans and credit cards delinquent 90 days and over which have yet to be formally classified Special Mention, Substandard or Doubtful by the Bank’s Loan Committee. In most instances, the monthly formula total is comprised primarily of residential real estate loans, consumer loans, credit cards and commercial loans under $250 thousand. However, commercial loans are typically formally classified by the Loan Committee no later than their 90-day delinquency, and those do not become part of the formula classification. Real estate loans 90-days delinquent that are in the foreclosure process, which is typically completed within another 60 days, are not formally classified during this period.

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

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

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The Bank classifies its loan portfolios using internal credit quality ratings, as discussed above under Allowance for Loan Losses. The following table provides a summary of loans by portfolio type and the Bank’s internal credit quality ratings as of June 30, 2022, and December 31, 2021:

	June 30, 2022		December 31, 2021
	(Dollars in thousands)
Pass:
Commercial & industrial	$	242,023	$	266,300
Commercial mortgage		695,887		642,835
Commercial construction		8,391		23,588
Commercial agriculture		572		592
Residential mortgage		142,294		133,176
Home equity		2,537		2,232
Automobile		17,704		18,179
Other consumer		150,687		145,190
Total pass loans		1,260,095		1,232,092
Special Mention:
Commercial & industrial		13,915		9,760
Commercial mortgage		21,267		11,051
Residential mortgage		-		-
Total special mention loans		35,182		20,811
Substandard:
Commercial & industrial		10,825		12,645
Commercial mortgage		43,587		44,661
Residential mortgage		1,093		613
Other consumer		-		2
Total substandard loans		55,505		57,921
Formula Classified:
Residential mortgage		1,132		1,588
Automobile		55		41
Other consumer		975		1,016
Total formula classified loans		2,162		2,645
Doubtful:
Commercial & industrial		6,626		7,130
Commercial mortgage		642		722
Total doubtful loans		7,268		7,852
Total outstanding loans, gross	$	1,360,212	$	1,321,321

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the original contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

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

Impairment is measured on a loan-by-loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral (if the loan is collateral-dependent). Large groups of smaller-balance homogeneous loans, such as consumer loans, are collectively evaluated for impairment. Impairment reserves for these groups of consumer loans are determined using historical loss given default rates for similar loans.

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The following table sets forth information regarding non-accrual loans and restructured loans at June 30, 2022 and December 31, 2021:

	June 30, 2022		December 31, 2021
	(Dollars in thousands)
Impaired loans:
Restructured loans:
Non-accruing restructured loans	$	4,497	$	6,083
Accruing restructured loans		33,888		32,595
Total restructured loans		38,385		38,678
Other impaired loans		13,223		13,105
Total impaired loans	$	51,608	$	51,783
Impaired loans less than 90 days delinquent    and included in total impaired loans	$	37,146	$	38,398

The table below contains additional information with respect to impaired loans, by portfolio type, at June 30, 2022 and December 31, 2021:

	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
June 30, 2022, with no related allowance recorded:
Commercial & industrial	$	12,054	$	12,054	$	22,766	$	37
Commercial mortgage		35,792		36,359		71,895		148
Residential mortgage		1,385		1,385		2,288		1
Other consumer		-		-		-		-
Total impaired loans with no related allowance	$	49,231	$	49,798	$	96,949	$	186
June 30, 2022, with a related allowance recorded:
Commercial & industrial	$	269	$	269	$	325	$	2
Commercial mortgage		178		193		107		148
Residential mortgage		900		900		1,172		-
Automobile		55		55		88		1
Other consumer		975		975		1,336		8
Total impaired loans with a related allowance	$	2,377	$	2,392	$	3,028	$	159
December 31, 2021, with no related allowance recorded:
Commercial & industrial	$	11,150	$	11,150	$	75,812	$	56
Commercial mortgage		36,935		37,182		38,456		149
Residential mortgage		612		612		221		-
Other consumer		2		2		4		-
Total impaired loans with no related allowance	$	48,699	$	48,946	$	114,493	$	205
December 31, 2021, with a related allowance recorded:
Commercial & industrial	$	262	$	262	$	116	$	2
Commercial mortgage		112		127		75		-
Residential mortgage		1,653		1,663		1,921		1
Automobile		41		41		29		1
Other consumer		1,016		1,016		1,253		8
Total impaired loans with a related allowance	$	3,084	$	3,109	$	3,394	$	12

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Troubled Debt Restructurings

In accordance with FASB’s Accounting Standards Update No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring” (ASU No. 2011-02), the Bank had $38.4 million of troubled debt restructurings (“TDRs”) as of June 30, 2022, down by $293 thousand from $38.7 million at December 31, 2021, primarily in commercial mortgage loans. The restructured loans recorded with the Bank have been modified for the purpose of alleviating temporary impairments to the borrower’s financial condition. The modifications that the Bank has extended to borrowers have come in the form of a change in the repayment terms. The restructuring plan between the borrower and the Bank is designed to provide a bridge for cash flow shortfalls in the near term. As the borrower works through the near-term issues, in most cases, the original contractual terms will be reinstated.

Additional information regarding performing and nonperforming TDRs at June 30, 2022 and December 31, 2021 is set forth in the following table:

	Number of		Pre- Modification Outstanding Recorded		Principal		Post- Modification Outstanding Recorded		Outstanding Balance
	Loans		Investment		Modifications		Investment		June 30, 2022		December 31, 2021
Performing
Residential mortgage		-	$	-	$	-	$	-	$	-	$	-
Commercial & industrial		9		6,039		-		6,039		4,989		3,696
Commercial mortgage		1		28,899		-		28,899		28,899		28,899
Consumer		-		-		-		-		-		-
Total performing		10		34,938		-		34,938		33,888		32,595
Nonperforming
Commercial & industrial		2		275		-		275		116		142
Commercial mortgage		6		5,954		-		5,954		4,381		5,941
Consumer		-		-		-		-		-		-
Total nonperforming		8		6,229		-		6,229		4,497		6,083
Total Troubled Debt    Restructurings		18	$	41,167	$	-	$	41,167	$	38,385	$	38,678

Principal modification includes principal forgiveness at the time of modification, contingent principal forgiveness granted over the life of the loan based on borrower performance.  

In an effort to constructively work with borrowers affected by the COVID-19 pandemic, the Bank initiated a temporary program in March 2020 to allow for 90-day deferrals for residential mortgage and commercial loans upon request from the borrower, and a 90-day deferral for all consumer and automobile loans. The Bank did not identify these loans that were deferred and were over 30 days delinquent as TDRs. The Bank identified a specific reserve for consumer loans totaling $3.8 million at June 30, 2022. The Bank also increased its environmental factors for the reserve to account for the effects of the COVID-19 pandemic.   The Bank continues to process commercial and consumer deferral requests on a case-by-case basis.

There were no defaults on troubled debt restructurings following the modification during the six months ended June 30, 2022 and 2021.

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.

Note 6 – Commitments and Contingencies

The Bank is involved in certain legal actions and claims that arise in the ordinary course of business. Management believes that, as a result of its legal defenses and insurance arrangements, none of these matters is expected to have a material adverse effect on the Bank’s, BGIS’s or the Company’s financial condition, results of operations or cash flows.

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Note 7 – Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the United States federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s, BGIS’s and the Company’s condensed consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items, as calculated under regulatory accounting practices.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). 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 are no conditions or events since the Bank’s last regulatory examination that management believes have changed the Bank’s category.       

The Company’s actual capital amounts and ratios as of June 30, 2022 and December 31, 2021 are presented in the table below.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective 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	%

Note 8 – Off-Balance-Sheet Activities

The Bank is a party to credit-related financial instruments with off-balance-sheet risk to meet the financing needs of its customers in the normal course of business. 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 addition to the amount reflected in the condensed consolidated financial statements.

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The Bank’s exposure to credit loss, in the event of nonperformance by the other parties to financial instruments for loan commitments and letters of credit, is represented by the contractual amount of these instruments. The Bank follows the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

A summary of financial instruments with off-balance-sheet risk at June 30, 2022 and December 31, 2021 is as follows:

	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 some 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 creditworthiness 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. These letters of credit are primarily issued to support public and private borrowing arrangements. The majority of all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers, and similar credit underwriting standards are applied. The Bank generally holds collateral supporting those commitments.

The Bank considers its standby and other letters of credit to be payment guarantees. At June 30, 2022, the maximum undiscounted future payments that the Bank could be required to make for all outstanding letters of credit were $49.8 million. All of these arrangements mature within one year. The Bank has recourse to recover from the customer any amounts paid under these guarantees. Most of the guarantees are fully collateralized; however, several are unsecured. The Bank had recorded $51 thousand in reserve liabilities associated with these guarantees at June 30, 2022.

Note 9 – Income Taxes

We record an amount equal to the tax credits, tax loss carry-forwards and tax deductions (“tax benefits”) that we believe will be available to offset or reduce the amounts of income taxes in future periods as a deferred tax asset on our condensed consolidated statements of financial condition. Under applicable federal and state income tax laws and regulations in the United States, such tax benefits will expire if not used within specified periods of time. Accordingly, the ability to fully use the deferred tax asset depends on the amount of taxable income that we generate during those time periods. At least once each year, or more frequently if warranted, we make an estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely than not that we will be unable to utilize those tax benefits in full prior to their expiration, then we would establish a (or increase any existing) valuation allowance to reduce the deferred tax asset on our balance sheet to the amount which we believe we are more likely than not to be able to utilize. Such a reduction is implemented by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that we would otherwise have recorded in our condensed consolidated statements of income. The determination of whether and the extent to which we will be able to utilize our deferred tax asset involves significant management judgments and assumptions that are subject to period-to-period changes as a result of changes in tax laws, changes in the market, or economic conditions that could affect our operating results or variances between our actual operating results and our projected operating results, as well as other factors.

There was no valuation allowance at June 30, 2022  and December 31, 2021, respectively, because, in management’s opinion, it is more likely than not that the total deferred tax asset of $27.0 million and $14.0 million, respectively, will be realized.

The difference between the effective income tax expense and the income tax expense computed at the Guam statutory rate of 21% was due to nontaxable interest income earned on loans to the Government of Guam.

In addition to filing a federal income tax return in Guam, the Bank files income tax returns in the CNMI and the State of California. The Bank is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2012.

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Note 10 – Fair Value Measurements

The Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with ASC Topic 820 “Fair Value Measurements and Disclosures”, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance of ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under then-current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under then-current market conditions depends on the facts and circumstances, and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under then-current market conditions.

Fair Value Hierarchy

In accordance with the guidance of ASC Topic 820, the Bank groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2: Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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Financial assets measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 are as follows:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
At June 30, 2022
Available-for-sale Securities:
U.S. treasury notes and bonds	$	-	$	-	$	-	$	-
U.S. government agency and government    sponsored enterprise (GSE) debt securities		-		98,421		-		98,421
U.S. government agency pool securities		-		66,333		-		66,333
U.S. government agency or GSE		-		375,841		-		375,841
Total fair value of available-for-sale securities		-		540,595		-		540,595
Other assets:
MSRs		-		-		1,551		1,551
Total fair value	$	-	$	540,595	$	1,551	$	542,146
At December 31, 2021
Available-for-sale Securities:
U.S. treasury notes and bonds	$	-	$	-	$	-	$	-
U.S. government agency and government    sponsored enterprise (GSE) debt securities		-		110,962		-		110,962
U.S. government agency pool securities		-		20,861		-		20,861
U.S. government agency or GSE		-		367,543		-		367,543
Total fair value of available-for-sale securities		-		499,366		-		499,366
Other assets:
MSRs		-		-		1,581		1,581
Total fair value	$	-	$	499,366	$	1,581	$	500,947

There were no liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021.

As of June 30, 2022 and December 31, 2021, the changes in Level 3 assets measured at fair value on a recurring basis are as follows:

	June 30, 2022			December 31, 2021
Beginning balance	$	1,581		$	1,683
Realized and unrealized net losses:
Included in net income		(30	)		(102	)
Ending balance	$	1,551		$	1,581

The valuation technique used for Level 3 mortgage servicing rights is their discounted cash flow. Inputs considered in determining Level 3 pricing include the anticipated prepayment rates, discount rates, and cost to service. Significant increases or decreases in any of those inputs in isolation would result in a significantly lower or higher fair value measurement.

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The following table presents quantitative information about the valuation technique and unobservable inputs applied to Level 3 fair value measurements for financial instruments measured at fair value on a recurring basis:

	Estimated Fair Value		Valuation Technique	Unobservable Inputs	Range of Inputs	Weighted Average Rate
June 30, 2022
Financial instrument:
MSRs	$	1,551	Discounted Cash Flow	Discount Rate	6.02% - 7.93%	7.20%
				Weighted Average Prepayment Rate (Public Securities Association)	100%
December 31, 2021
Financial instrument:
MSRs	$	1,581	Discounted Cash Flow	Discount Rate	6.02% - 7.93%	7.20%
				Weighted Average Prepayment Rate (Public Securities Association)	125%

There were no transfers into or out of the Bank’s Level 3 financial instruments for the periods ended June 30, 2022 and December 31, 2021.

Nonrecurring Fair Value Measurements

Under certain circumstances, the Bank makes adjustments to fair value for assets and liabilities even though they are not measured at fair value on an ongoing basis. The Bank did not have any financial instruments carried on the consolidated statements of financial condition by caption and by level in fair value hierarchy for a nonrecurring change in fair value at June 30, 2022 and December 31, 2021, respectively.  

The fair value of loans subject to write downs is estimated using the appraised value of the underlying collateral, discounted as necessary due to management’s estimates of changes in economic conditions.

Additionally, the Bank makes adjustments to nonfinancial assets and liabilities even though they are not measured at fair value on an ongoing basis. The Bank does not have nonfinancial assets or liabilities for which a nonrecurring change in fair value has been recorded during the periods ended June 30, 2022 and December 31, 2021.

The following methods and assumptions were used by the Bank in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents

The carrying amount of cash and short-term instruments approximates fair value based on the short-term nature of the assets.

Interest-Bearing Deposits in Banks

Fair values for other interest-bearing deposits are estimated using discounted cash flow analyses based on current interest rates or yields for similar types of deposits.

Federal Home Loan Bank Stock

The Bank is a member of the FHLB of Des Moines. As a member, we are required to own stock of the FHLB, the amount of which is based primarily on the level of our borrowings from that institution. We also have the right to acquire additional shares of stock in the FHLB; however, to date, we have not done so. It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

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Investment Securities

When quoted prices are available in an active market, the Bank classifies the securities within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury notes and bonds. At June 30, 2022, the Company classified trading securities in Level 1.

If quoted market prices are not available, the Bank estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. GSE obligations, U.S. government agency pool securities, and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Bank would classify those securities in Level 3. At June 30, 2022 and December 31, 2021, the Bank did not have any Level 3 investment securities.

Loans

For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, based upon interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Loans are classified in Level 3.

Mortgage Servicing Rights

The fair value of MSRs is determined using models which depend on estimates of prepayment rates, discount rates and costs to service. MSRs are classified in Level 3.

Deposit Liabilities

The fair values disclosed for demand deposits (for example, interest and non-interest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies current market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits. Deposit liabilities are classified in Level 3.

Short-Term Borrowings

The carrying amounts of federal funds purchased and FHLB advances maturing within ninety days approximate their fair values. We had no outstanding short-term borrowings at June 30, 2022 and December 31, 2021.

Long-Term Borrowings

The fair value of FHLB advances maturing after ninety days is determined based on expected present value techniques using current market interest rates for advances with similar terms and remaining maturities. We had no outstanding long-term borrowings at June 30, 2022 and December 31, 2021.

Accrued Interest

The carrying amount of accrued interest approximates fair value.

Off-Balance Sheet Commitments and Contingent Liabilities

Management does not believe it is practicable to provide an estimate of fair value for off-balance sheet commitments or contingent liabilities because of the uncertainty involved in attempting to assess the likelihood and timing of a commitment being drawn upon, coupled with a lack of an established market for these instruments and the wide diversity of fee structures.

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Fair Value of Other Financial Instruments

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

			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3
	(Dollars in thousands)
June 30, 2022
Financial assets:
Cash and cash equivalents	$	325,440	$	325,440	$	-	$	-
Restricted cash		150		150		-		-
Federal Home Loan Bank stock		3,318		-		3,318		-
Investment securities held-to-maturity		318,726		-		261,694		-
Loans, net		1,321,504		-		-		1,368,157
Total	$	1,969,138	$	325,590	$	265,012	$	1,368,157
Financial liabilities:
Deposits		2,447,806		-		-		2,449,540
Total	$	2,447,806	$	-	$	-	$	2,449,540
December 31, 2021
Financial assets:
Cash and cash equivalents	$	557,403	$	557,403	$	-	$	-
Restricted cash		150		150		-		-
Federal Home Loan Bank stock		2,814		-		2,814		-
Investment securities held-to-maturity		312,294		-		310,372		-
Loans, net		1,283,690		-		-		1,330,529
Total	$	2,156,351	$	557,553	$	313,186	$	1,330,529
Financial liabilities:
Deposits	$	2,533,231	$	-	$	-	$	2,527,806
Total	$	2,533,231	$	-	$	-	$	2,527,806

Note 11 – Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:

	June 30, 2022			December 31, 2021
Net unrealized (loss) gain on available-for-sale securities	$	(60,238	)	$	(5,857	)
Amounts reclassified from AOCI for (gain) on sale of investment    securities available-for-sale included in net income		-			(272	)
Tax effect		13,563			1,380
Unrealized holding (loss) gain on available-for-sale securities, net of tax		(46,675	)		(4,749	)
Gross unrealized holding loss on held-to-maturity securities		(11,972	)		(15,864	)
Amortization of unrealized holding loss on held-to-maturity during the    period		430			3,892
Unrealized holding loss on held-to-maturity securities		(11,542	)		(11,972	)
Accumulated other comprehensive (loss) income	$	(58,217	)	$	(16,721	)

Note 12 – Leases

The Bank leases certain land, office spaces, and storage spaces. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Instead, the Bank recognizes lease expense for these leases on a straight-line basis over the lease term.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 50 years or more. The exercise of lease renewal options is at our sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease terms, unless there is a transfer of title or purchase option reasonably certain of exercise.

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Certain of our lease agreements include rental payments based on a percentage of the prevailing market value of the lease and the average of the Treasury Bill Rate and the Guam Consumer Price Index figure, and others include rental payments adjusted periodically for inflation. The Bank's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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 years ending December 31, 2022 and 2023, respectively.

The cash flow from operating leases included in the measurement of lease liabilities during the six months ended June 30, 2022 and 2021 were $1.4 million and $1.8 million, respectively.

The following table summarizes the lease-related assets and liabilities recorded as part of other assets and other liabilities, respectively, in our condensed consolidated statements of financial condition at June 30, 2022 and December 31, 2021:

	June 30, 2022		December 31, 2021
Assets
Operating lease right-of-use assets	$	28,437	$	23,379
Total lease assets	$	28,437	$	23,379
Liabilities
Current
Operating	$	1,947	$	1,926
Noncurrent
Operating		27,354		22,186
Total lease liabilities	$	29,301	$	24,112

The operating lease costs and variable lease costs were $772 thousand and $1.6 million during the three and six months ended June 30, 2022, respectively, and $959 thousand and $1.9 million during the three and six months ended June 30, 2021, respectively.   

The following table provides the maturities of lease liabilities at June 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)	$	29,301	$	29,301

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 $19.1 million related to options to extend 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.

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The following table provides the weighted-average lease term and discount rate at June 30, 2022:

	June 30, 2022			December 31, 2021
Weighted-average remaining lease term (years)
Operating leases		25.8			25.6
Weighted-average discount rate
Operating leases		4.01	%		4.15	%

Note 13 – Subordinated Debt

On June 29, 2021, the Company issued $20.0 million in aggregate principal amount of its 4.75% Fixed-to-Floating Rate Subordinated Notes due July 1, 2031 (the “2031 Notes”).

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 Secured Overnight Financing Rate (“SOFR”) plus 413 basis points. The Company is required to pay interest semi-annually during the fixed period, and quarterly during the floating rate period. The principal sum of the 2031 Notes plus any unpaid interest are due on the maturity date.

On June 27, 2019, the Company issued $15.0 million in aggregate principal amount of its 6.35% Fixed-to-Floating Rate Subordinated Notes due June 30, 2029 (the “2029 Notes” and together with the 2031 Notes, the “Notes”).

The 2029 Notes have a ten-year term and initially bear interest at a fixed annual rate of 6.35%. Beginning June 30, 2024, the interest rate will reset quarterly to the then-current three-month LIBOR plus 466 basis points. The Company is required to pay interest only semi-annually during the fixed period, and quarterly during the floating rate period. The principal sum of the 2029 Notes plus any unpaid interest are due on the maturity date.

Both notes are unsecured, subordinated obligations of the Company only and are not obligations of, and are not guaranteed by, any subsidiary of the Company. The Notes rank junior in right to payment to the Company’s current and future senior indebtedness.

Note 14 – Subsequent Events

On July 25, 2022, the Company held its annual shareholders meeting and the shareholders approved a 1-for-500 reverse stock split. The Company expects to complete the transaction in the fourth quarter of 2022, subject to the receipt of all regulatory approvals.

Management has reviewed the events occurring through the date of this report, and there were no subsequent events that require additional disclosure to the accompanying financial statements.

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

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.

Overview

BankGuam Holding Company (the “Company”) is a Guam corporation organized on October 29, 2010, to act as a holding company of Bank of Guam (the “Bank”), a 17-branch bank serving the communities in Guam, the Commonwealth of the Northern Mariana Islands (“CNMI”), the Federated States of Micronesia (“FSM”), the Republic of the Marshall Islands (“RMI”), the Republic of Palau (“ROP”), and San Francisco, California. On August 15, 2011, the Company acquired all of the outstanding common stock of the Bank in a holding company formation transaction.

In August 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.

In May 2016, the Company entered into a Stock Purchase Agreement (the “Agreement”) to acquire up to 70% of ASC Trust LLC, formerly ASC Trust Corporation, a Guam trust company. In July 2016, subsequent to the approval of the Federal Reserve Bank of San Francisco in June 2016, the first purchase of 25% of ASC Trust LLC was completed. In July 2019, the Company completed the second purchase of an additional 20% of ASC Trust LLC, bringing its ownership to 45%. As stated in Note 4 – Investment Securities, and with the approval of the Federal Reserve Bank of San Francisco, an additional 25% of ASC Trust LLC was purchased by the Company in July 2021. This transaction brought the Company’s ownership of ASC Trust LLC to 70%, and completes the transactions contemplated by the Agreement. The Company evaluated its ownership in ASC Trust LLC after the last transaction in accordance to ASC 810 – Consolidation, and determined that the Company has control over ASC 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 the Bank, BGIS and ASC Trust LLC, the Company conducts no significant activities, although it is authorized, with the prior approval of its principal regulator, the Board of Governors of the Federal Reserve System, 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 and Chalan 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.

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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 ended June 30, 2022 and 2021, respectively:

	Three Months Ended June 30,							Six Months Ended June 30,
	2022 Amount		2021 Amount		% Change			2022 Amount		2021 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	$	9,205		-17.0	%
Earnings per common share (EPS):
Basic and diluted EPS	$	0.39	$	0.59				$	0.71	$	0.92

As the above table indicates, our net income decreased in the three and six months ended June 30, 2022, as compared to the corresponding periods in 2021. In the three months ended June 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 to ASC 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 from ASC Trust LLC, and the $580 thousand increase in trustee fees, partially offset by the $919 thousand decrease in other income.

In the six months ended June 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 to ASC 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 from ASC 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 ended June 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 ended June 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 the SEC on March 28, 2022, and Note 2 of Item 1 in this report. Our unaudited condensed consolidated financial

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statements are prepared in accordance with generally accepted accounting principles in the 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 the Federal 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 ended June 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 June 30, 2022 as compared to the corresponding period in 2021.