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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 September 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 October 31, 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 September 30, 2022 and December 31, 2021

3

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021

5

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

 

 

 

Item 4.

Controls and Procedures

55

 

 

PART II. OTHER INFORMATION

56

 

 

 

Item 6.

Exhibits

57

 

 

 

Signatures

58

 

 

 

 

 

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)

 

 

 

September 30, 2022

 

 

December 31, 2021

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

38,850

 

 

$

36,660

 

Interest bearing deposits in banks

 

 

226,163

 

 

 

520,743

 

Total cash and cash equivalents

 

 

265,013

 

 

 

557,403

 

Restricted cash

 

 

150

 

 

 

150

 

Investment securities available-for-sale, at fair value

 

 

499,235

 

 

 

499,366

 

Investment securities held-to-maturity, at amortized cost

   (Fair Value $240,329 at 9/30/2022 and $310,372 at 12/31/2021)

 

 

317,593

 

 

 

312,294

 

Federal Home Loan Bank stock, at cost

 

 

3,318

 

 

 

2,814

 

Loans, net of allowance for loan losses

   ($36,137 at 9/30/2022 and $34,408 at 12/31/2021)

 

 

1,306,889

 

 

 

1,283,690

 

Accrued interest receivable

 

 

6,054

 

 

 

6,715

 

Premises and equipment, net

 

 

20,381

 

 

 

20,802

 

Goodwill

 

 

13,014

 

 

 

13,014

 

Intangible assets

 

 

10,165

 

 

 

10,720

 

Other assets

 

 

122,935

 

 

 

84,620

 

Total assets

 

$

2,564,747

 

 

$

2,791,588

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

881,754

 

 

$

981,537

 

Interest bearing

 

 

1,469,395

 

 

 

1,551,694

 

Total deposits

 

 

2,351,149

 

 

 

2,533,231

 

Accrued interest payable

 

 

30

 

 

 

46

 

Subordinated debt, net

 

 

34,451

 

 

 

34,400

 

Other liabilities

 

 

50,692

 

 

 

43,162

 

Total liabilities

 

 

2,436,322

 

 

 

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 9/30/2022 and

   12/31/2021, respectively

 

 

2,034

 

 

 

2,033

 

Preferred stock $100 par value; 300 shares authorized; 9.8 shares issued

   and outstanding at 9/30/2022 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

 

 

162,725

 

 

 

153,740

 

Accumulated other comprehensive (loss) income

 

 

(78,032

)

 

 

(16,721

)

Non-controlling interest

 

 

7,216

 

 

 

7,294

 

Common stock in treasury, at cost (32 shares)

 

 

(290

)

 

 

(290

)

Total stockholders’ equity

 

 

128,425

 

 

 

180,749

 

Total liabilities and stockholders’ equity

 

$

2,564,747

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

19,031

 

 

$

18,011

 

 

$

54,399

 

 

$

53,903

 

Investment securities

 

 

3,605

 

 

 

2,591

 

 

 

10,188

 

 

 

7,190

 

Deposits with banks

 

 

1,397

 

 

 

294

 

 

 

2,286

 

 

 

508

 

Total interest income

 

 

24,033

 

 

 

20,896

 

 

 

66,873

 

 

 

61,601

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

 

37

 

 

 

112

 

 

 

114

 

 

 

326

 

Time deposits

 

 

3

 

 

 

7

 

 

 

11

 

 

 

27

 

Other borrowed funds

 

 

476

 

 

 

481

 

 

 

1,417

 

 

 

957

 

Total interest expense

 

 

516

 

 

 

600

 

 

 

1,542

 

 

 

1,310

 

Net interest income

 

 

23,517

 

 

 

20,296

 

 

 

65,331

 

 

 

60,291

 

Provision for loan losses

 

 

1,425

 

 

 

2,475

 

 

 

4,275

 

 

 

5,425

 

Net interest income, after provision for loan losses

 

 

22,092

 

 

 

17,821

 

 

 

61,056

 

 

 

54,866

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges and fees

 

 

4,935

 

 

 

4,336

 

 

 

15,487

 

 

 

7,843

 

Gain on sale of investment securities

 

 

-

 

 

 

10

 

 

 

-

 

 

 

281

 

Income from merchant services, net

 

 

966

 

 

 

721

 

 

 

2,509

 

 

 

2,127

 

Cardholders income, net

 

 

1,131

 

 

 

994

 

 

 

2,669

 

 

 

2,239

 

Trustee fees

 

 

861

 

 

 

136

 

 

 

1,676

 

 

 

437

 

Other income

 

 

743

 

 

 

4,146

 

 

 

2,213

 

 

 

7,101

 

Total non-interest income

 

 

8,636

 

 

 

10,343

 

 

 

24,554

 

 

 

20,028

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,904

 

 

 

10,086

 

 

 

28,745

 

 

 

26,786

 

Occupancy

 

 

2,603

 

 

 

2,268

 

 

 

7,267

 

 

 

6,529

 

Technology, equipment and depreciation

 

 

5,973

 

 

 

3,149

 

 

 

16,641

 

 

 

9,173

 

Insurance

 

 

468

 

 

 

486

 

 

 

1,391

 

 

 

1,491

 

Telecommunications

 

 

417

 

 

 

419

 

 

 

1,271

 

 

 

1,174

 

FDIC assessment

 

 

299

 

 

 

709

 

 

 

917

 

 

 

1,569

 

Professional services

 

 

661

 

 

 

784

 

 

 

2,268

 

 

 

1,976

 

Contract services

 

 

484

 

 

 

1,282

 

 

 

1,403

 

 

 

2,622

 

Other real estate owned

 

 

13

 

 

 

(28

)

 

 

38

 

 

 

(1

)

Stationery and supplies

 

 

203

 

 

 

129

 

 

 

534

 

 

 

202

 

Training and education

 

 

320

 

 

 

93

 

 

 

887

 

 

 

177

 

General, administrative and other

 

 

2,673

 

 

 

1,913

 

 

 

8,082

 

 

 

4,852

 

Total non-interest expense

 

 

24,018

 

 

 

21,290

 

 

 

69,444

 

 

 

56,550

 

Income before income taxes

 

 

6,710

 

 

 

6,874

 

 

 

16,166

 

 

 

18,344

 

Income tax expense

 

 

1,388

 

 

 

1,311

 

 

 

3,201

 

 

 

3,576

 

Net income

 

 

5,322

 

 

 

5,563

 

 

 

12,965

 

 

 

14,768

 

Net income attributable to noncontrolling interest

 

 

167

 

 

 

318

 

 

 

634

 

 

 

318

 

Net income available to BankGuam Holding Company

 

 

5,155

 

 

 

5,245

 

 

 

12,331

 

 

 

14,450

 

Preferred stock dividend

 

 

(177

)

 

 

(125

)

 

 

(422

)

 

 

(396

)

Net income attributable to common stockholders

 

$

4,978

 

 

$

5,120

 

 

$

11,909

 

 

$

14,054

 

Earnings per common share (EPS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted EPS

 

$

0.51

 

 

$

0.53

 

 

$

1.22

 

 

$

1.45

 

Dividends declared per common share

 

$

0.10

 

 

$

0.10

 

 

$

0.30

 

 

$

0.30

 

Basic and diluted weighted average common shares

 

 

9,728

 

 

 

9,723

 

 

 

9,726

 

 

 

9,714

 

 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

 

$

5,322

 

 

$

5,563

 

 

$

12,965

 

 

$

14,768

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) on available-for-sale

   securities arising during the period, net of tax

 

 

(20,030

)

 

 

(1,139

)

 

 

(61,956

)

 

 

(16,729

)

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

 

 

 

124

 

 

 

645

 

 

 

237

 

Total other comprehensive income (loss)

 

 

(19,815

)

 

 

(1,015

)

 

 

(61,311

)

 

 

(16,764

)

Total comprehensive income (loss)

 

$

(14,493

)

 

$

4,548

 

 

$

(48,346

)

 

$

(1,996

)

 

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

 

   Noncontrolling interest in connection with acquisition of ASC

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,155

 

 

 

-

 

 

 

-

 

 

 

167

 

 

 

5,322

 

Change in accumulated other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-

   sale securities, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(19,815

)

 

 

-

 

 

 

-

 

 

 

(19,815

)

Common stock issued under Employee Stock

   Purchase Plan & Service Awards

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Return of capital from stocks owned by subsidiary

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

3

 

Cash dividends on common stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(975

)

 

 

-

 

 

 

-

 

 

 

(205

)

 

 

(1,180

)

Cash dividends on preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(177

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(177

)

Balances, September 30, 2022

 

 

9,728

 

 

$

2,034

 

 

$

980

 

 

$

24,989

 

 

$

8,803

 

 

$

162,725

 

 

$

(78,032

)

 

$

(290

)

 

$

7,216

 

 

$

128,425

 

 


6

 

 

 

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

 

 

9,702,136

 

 

$

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

 

 

11,436

 

 

 

2

 

 

 

-

 

 

 

95

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

97

 

Cash dividends on common stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(970

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(970

)

Cash dividends on preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(135

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(135

)

Balances, March 31, 2021

 

 

9,713,572

 

 

$

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

 

 

9,243

 

 

 

2

 

 

 

-

 

 

 

89

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

91

 

Cash dividends on common stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(972

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(972

)

Cash dividends on preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(136

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(136

)

Balances, June 30, 2021

 

 

9,722,815

 

 

$

2,033

 

 

$

980

 

 

$

24,961

 

 

$

8,803

 

 

$

144,638

 

 

$

(12,638

)

 

$

(290

)

 

$

-

 

 

$

168,487

 

   Noncontrolling interest in connection with acquisition of ASC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,245

 

 

 

-

 

 

 

-

 

 

 

318

 

 

 

5,563

 

Change in accumulated other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-

   sale securities, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,015

)

 

 

-

 

 

 

-

 

 

 

(1,015

)

Common stock issued under Employee Stock

   Purchase Plan & Service Awards

 

 

7,760

 

 

 

2

 

 

 

-

 

 

 

84

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

86

 

Return of capital from stocks owned by subsidiary

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(211

)

Cash dividends on common stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(972

)

 

 

-

 

 

 

-

 

 

 

(398

)

 

 

(1,370

)

Cash dividends on preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(125

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(125

)

Balances, September 30, 2021

 

 

9,730,575

 

 

$

2,031

 

 

$

980

 

 

$

24,834

 

 

$

8,803

 

 

$

148,786

 

 

$

(13,653

)

 

$

(290

)

 

$

7,348

 

 

$

178,839

 

 

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

 

7

 

BankGuam Holding Company

Unaudited Condensed Consolidated Statements of Cash Flows

(in Thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

12,965

 

 

$

14,768

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

4,275

 

 

 

5,425

 

Depreciation

 

 

4,026

 

 

 

3,190

 

Amortization of debt issuance costs

 

 

51

 

 

 

30

 

Amortization of fees, discounts and premiums

 

 

47

 

 

 

260

 

Proceeds from sales of loans held for sale

 

 

6,371

 

 

 

22,361

 

Origination of loans held for sale

 

 

(6,371

)

 

 

(22,361

)

Decrease (increase) in mortgage servicing rights

 

 

(59

)

 

 

(202

)

Gross realized gains on sale of available-for-sale securities

 

 

-

 

 

 

(281

)

Realized loss on sale of premises and equipment

 

 

75

 

 

 

9

 

Noncash lease expense

 

 

(4,468

)

 

 

2,144

 

Increase in deferred tax asset

 

 

(18,213

)

 

 

(3,737

)

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

661

 

 

 

1,848

 

Other assets

 

 

(15,650

)

 

 

(6,982

)

Accrued interest payable

 

 

(16

)

 

 

(24

)

Lease liability

 

 

4,603

 

 

 

(1,943

)

Other liabilities

 

 

2,907

 

 

 

2,562

 

Net cash (used in) provided by operating activities

 

 

(8,796

)

 

 

17,067

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of subsidiary, ASC Trust LLC

 

 

-

 

 

 

(5,340

)

Purchases of available-for-sale securities

 

 

(133,262

)

 

 

(289,615

)

Purchases of held-to-maturity securities

 

 

(9,645

)

 

 

(28,060

)

Proceeds from sales of available-for-sale securities

 

 

-

 

 

 

46,993

 

Maturities, prepayments and calls of available-for-sale securities

 

 

71,380

 

 

 

48,668

 

Maturities, prepayments and calls of held-to-maturity securities

 

 

4,945

 

 

 

24,525

 

Loan originations and principal collections, net

 

 

(27,456

)

 

 

57,916

 

Income from equity investment in unconsolidated subsidiary

 

 

-

 

 

 

(1,183

)

Dividends received from unconsolidated subsidiary

 

 

-

 

 

 

1,154

 

Purchase of FHLB stock

 

 

(504

)

 

 

(479

)

Proceeds from sales of premises and equipment

 

 

-

 

 

 

11

 

Purchases of premises and equipment

 

 

(3,049

)

 

 

(3,422

)

Net cash used in investing activities

 

 

(97,591

)

 

 

(148,832

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

 

(182,082

)

 

 

643,476

 

Cost from other borrowings

 

 

-

 

 

 

(12

)

Proceeds from issuance of subordinated debt, net

 

 

-

 

 

 

19,576

 

Proceeds from issuance of common stock

 

 

80

 

 

 

274

 

Dividends paid

 

 

(4,001

)

 

 

(3,708

)

Net cash (used in) provided by financing activities

 

 

(186,003

)

 

 

659,606

 

Net change in cash, cash equivalents and restricted cash

 

 

(292,390

)

 

 

527,841

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

557,553

 

 

 

287,778

 

Cash, cash equivalents and restricted cash at end of period

 

$

265,163

 

 

$

815,619

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

95

 

 

$

299

 

Income taxes

 

$

2,496

 

 

$

5,144

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Net change in unrealized loss on held-to-maturity securities, net of tax

 

$

645

 

 

$

237

 

Net change in unrealized gain on available-for-sale securities, net of tax

 

$

(61,957

)

 

$

(17,001

)

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.

8

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 September 30, 2022, and the condensed consolidated results of operations for the three and nine months ended September 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.

9

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 a total of 300bps; 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, 75bps to 2.25% - 2.50% on July 27, 2022, and 75bps to 3.00% - 3.25% on September 22, 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 has evaluated the impact the new guidance will have on its financial position, results of operations and regulatory risk-based capital, and has determined that it will be immaterial. The Company 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. 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 one year 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.

 


10

 

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 September 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 effected the reverse stock split on October 31, 2022.

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income available to BankGuam Holding Company

 

$

5,155

 

 

$

5,245

 

 

$

12,331

 

 

$

14,450

 

Less preferred stock dividends

 

 

(177

)

 

 

(125

)

 

 

(422

)

 

 

(396

)

Net income attributable to common stockholders

 

$

4,978

 

 

$

5,120

 

 

$

11,909

 

 

$

14,054

 

Weighted average number of common shares

   outstanding - used to calculate basic and diluted

   earnings per common share

 

 

9,728

 

 

 

9,723

 

 

 

9,726

 

 

 

9,714

 

Earnings per common share (EPS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted EPS

 

$

0.51

 

 

$

0.53

 

 

$

1.22

 

 

$

1.45

 

 

11

 

Note 4 – Investment Securities

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

 

 

 

September 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

 

$

114,972

 

 

$

-

 

 

$

(22,153

)

 

$

92,819

 

U.S. government agency pool securities

 

 

65,153

 

 

 

23

 

 

 

(655

)

 

 

64,521

 

U.S. government agency or GSE residential

   mortgage-backed securities

 

 

405,199

 

 

 

-

 

 

 

(63,304

)

 

 

341,895

 

Total

 

$

585,324

 

 

$

23

 

 

$

(86,112

)

 

$

499,235

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency and government sponsored

   enterprise (GSE) debt securities

 

$

277,028

 

 

$

-

 

 

$

(70,663

)

 

$

206,365

 

U.S. government agency pool securities

 

 

2,071

 

 

 

-

 

 

 

(41

)

 

 

2,030

 

U.S. government agency or GSE residential

   mortgage-backed securities

 

 

38,494

 

 

 

-

 

 

 

(6,560

)

 

 

31,934

 

Total

 

$

317,593

 

 

$

-

 

 

$

(77,264

)

 

$

240,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2022 and December 31, 2021, investment securities with a carrying value of $660.1 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 nine months ended September 30, 2022 and 2021 are shown below. There were no sales of investment securities for the three months ended September 30, 2022  and 2021.

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Proceeds from sales

 

$

-

 

 

$

46,993

 

Gross realized gains from sales

 

$

-

 

 

$

272

 

Gross realized losses from sales

 

$

-

 

 

$

-

 

 

 

12

 

 

The amortized cost and estimated fair value of investment securities by contractual maturity at September 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 September 30, 2022, obligations of U.S. government corporations and agencies with amortized costs totaling $902.9 million consisted of residential mortgage-backed securities totaling $443.7 million and Small Business Administration agency pool securities totaling $67.2 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 September 30, 2022, the Bank estimates the average remaining life of these mortgage-backed securities and SBA pools to be approximately 5.6 years each.

 

 

 

September 30, 2022

 

 

 

Available-for-Sale

 

 

Held-to-Maturity

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

Due within one year

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Due after one but within five years

 

 

9,385

 

 

 

8,908

 

 

 

2,568

 

 

 

2,358

 

Due after five but within ten years

 

 

157,687

 

 

 

132,278

 

 

 

70,805

 

 

 

56,840

 

Due after ten years

 

 

418,252

 

 

 

358,049

 

 

 

244,220

 

 

 

181,131

 

Total

 

$

585,324

 

 

$

499,235

 

 

$

317,593

 

 

$

240,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

13

 

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 September 30, 2022 and December 31, 2021.

 

 

 

September 30, 2022

 

 

 

Less Than Twelve Months

 

 

More Than Twelve Months

 

 

Total

 

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency and

   government sponsored enterprise

   (GSE) debt securities

 

$

-

 

 

$

-

 

 

$

(22,153

)

 

$

92,819

 

 

$

(22,153

)

 

$

92,819

 

U.S. government agency pool securities

 

 

(487

)

 

 

54,955

 

 

 

(168

)

 

 

4,559

 

 

 

(655

)

 

 

59,514

 

U.S. government agency or GSE

   residential mortgage-backed securities

 

 

(28,099

)

 

 

174,861

 

 

 

(35,205

)

 

 

167,034

 

 

 

(63,304

)

 

 

341,895

 

Total

 

$

(28,586

)

 

$

229,816

 

 

$

(57,526

)

 

$

264,412

 

 

$

(86,112

)

 

$

494,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US government agency and sponsored Agencies (GSE) debt securities

 

$

(33,687

)

 

$

79,190

 

 

$

(36,976

)

 

$

127,175

 

 

$

(70,663

)

 

$

206,365

 

U.S. government agency pool securities

 

 

(3

)

 

 

1,335

 

 

 

(38

)

 

 

695

 

 

 

(41

)

 

 

2,030

 

U.S. government agency or GSE

   residential mortgage-backed securities

 

 

(942

)

 

 

10,906

 

 

 

(5,618

)

 

 

21,029

 

 

 

(6,560

)

 

 

31,935

 

Total

 

$

(34,632

)

 

$

91,431

 

 

$

(42,632

)

 

$

148,899

 

 

$

(77,264

)

 

$

240,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

Less Than Twelve Months

 

 

More Than Twelve Months

 

 

Total

 

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency and

   government sponsored enterprise

   (GSE) debt securities

 

$

(2,824

)

 

$

82,145

 

 

$

(1,183

)

 

$

28,817

 

 

$

(4,007

)

 

$

110,962

 

U.S. government agency pool securities

 

 

(71

)

 

 

5,127

 

 

 

(176

)

 

 

14,743

 

 

 

(247

)

 

 

19,870

 

U.S. government agency or GSE

   residential mortgage-backed securities

 

 

(3,833

)

 

 

290,573

 

 

 

-

 

 

 

-

 

 

 

(3,833

)

 

 

290,573

 

Total

 

$

(6,728

)

 

$

377,845

 

 

$

(1,359

)

 

$

43,560

 

 

$

(8,087

)

 

$

421,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency and

   government sponsored enterprise

   (GSE) debt securities

 

$

(1,395

)

 

$

159,840

 

 

$

(226

)

 

$

114,726

 

 

$

(1,621

)

 

$

274,566

 

U.S. government agency pool securities

 

 

(37

)

 

 

1,507

 

 

 

(8

)

 

 

403

 

 

 

(45

)

 

 

1,910

 

U.S. government agency or GSE

   residential mortgage-backed securities

 

 

(362

)

 

 

28,498

 

 

 

(7

)

 

 

529

 

 

 

(369

)

 

 

29,027

 

Total

 

$

(1,794

)

 

$

189,845

 

 

$

(241

)

 

$

115,658

 

 

$

(2,035

)

 

$

305,503

 

 

The investment securities that were in an unrealized loss position as of September 30, 2022, which comprised a total of 238 securities, were not other-than-temporarily impaired. Specifically, the 238 securities are comprised of the following: 45 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”).  

14

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 or rating of the investment securities which remains at AAA by Moodys. All of the Company’s investment securities are either backed by the full faith and credit of the U.S. government or carry an implied guarantee. 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.

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 nine months ended September 30, 2022, the Bank originated and sold $6.4 million in FHLMC mortgage loans. During the nine months endedSeptember 30, 2021, the Bank originated and sold $22.4 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 $172.3 million at September 30, 2022, and $181.1 million at December 31, 2021. The decrease of $8.8 million (5.09%) during the nine months ended September 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 September 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 $2.9 million at September 30, 2022, and $3.2 million at December 31, 2021. As of September 30, 2022 and December 31, 2021, our 10 largest borrowing relationships in aggregate totaled $341.9 million, respectively, in commitments, or approximately 25.40% of our total gross loans.

In October 2022, the Bank entered into three agreements to purchase a loan portfolio and mortgage servicing rights from another financial institution in Guam. The portfolio consists of commercial loans and consumer mortgages that will be purchased in three phases and will be fully executed in the first quarter of 2023. The first phase was completed in October 2022.

15

The loan portfolio consisted of the following at:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

$

247,011

 

 

 

18.4

%

 

$

295,835

 

 

 

22.4

%

Commercial mortgage

 

 

772,433

 

 

 

57.4

%

 

 

699,269

 

 

 

52.9

%

Commercial construction

 

 

8,443

 

 

 

0.6

%

 

 

23,588

 

 

 

1.8

%

Commercial agriculture

 

 

562

 

 

 

0.0

%

 

 

592

 

 

 

0.0

%

Total commercial

 

 

1,028,449

 

 

 

76.4

%

 

 

1,019,284

 

 

 

77.1

%

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

145,380

 

 

 

10.8

%

 

 

135,377

 

 

 

10.2

%

Home equity

 

 

2,546

 

 

 

0.2

%

 

 

2,232

 

 

 

0.2

%

Automobile

 

 

18,189

 

 

 

1.4

%

 

 

18,220

 

 

 

1.4

%

Other consumer loans1

 

 

151,343

 

 

 

11.2

%

 

 

146,208

 

 

 

11.1

%

Total consumer

 

 

317,458

 

 

 

23.6

%

 

 

302,037

 

 

 

22.9

%

Gross loans

 

 

1,345,907

 

 

 

100.0

%

 

 

1,321,321

 

 

 

100.0

%

Deferred loan (fees) costs, net

 

 

(2,881

)

 

 

 

 

 

 

(3,223

)

 

 

 

 

Allowance for loan losses

 

 

(36,137

)

 

 

 

 

 

 

(34,408

)

 

 

 

 

Loans, net

 

$

1,306,889

 

 

 

 

 

 

$

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 September 30, 2022, the outstanding gross principal balance of PPP loans was $3.4 million with $51 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.

16

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 nine months ended September 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 nine months ended September 30, 2022, and 2021, and the year ended December 31, 2021:

 

 

 

Three Months Ended September 30, 2022

 

 

Three Months Ended September 30, 2021

 

 

Nine Months Ended September 30, 2022

 

 

Nine Months Ended September 30, 2021

 

 

Year Ended December 31, 2021

 

Balance, beginning of period

 

$

35,732

 

 

$

36,093

 

 

$

34,408

 

 

$

34,805

 

 

$

34,805

 

Charged off loans

 

 

(1,559

)

 

 

(968

)

 

 

(4,206

)

 

 

(3,723

)

 

 

(4,950

)

Recoveries on loans previously charged off

 

 

539

 

 

 

447

 

 

 

1,660

 

 

 

1,540

 

 

 

2,403

 

Provision for loan losses

 

 

1,425

 

 

 

2,475

 

 

 

4,275

 

 

 

5,425

 

 

 

2,150

 

Balance, end of period

 

$

36,137

 

 

$

38,047

 

 

$

36,137

 

 

$

38,047

 

 

$

34,408

 

 

17

 

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

 

 

 

Commercial

 

 

Residential

Mortgages

 

 

Consumer

 

 

Total

 

 

 

(Dollars in thousands)

 

Nine Months Ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

22,860

 

 

$

2,304

 

 

$

9,244

 

 

$

34,408

 

Charge-offs

 

 

(716

)

 

 

-

 

 

 

(3,490

)

 

 

(4,206

)

Recoveries

 

 

158

 

 

 

2

 

 

 

1,500

 

 

 

1,660

 

Provision

 

 

2,323

 

 

 

(26

)

 

 

1,978

 

 

 

4,275

 

Ending balance

 

$

24,625

 

 

$

2,280

 

 

$

9,232

 

 

$

36,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance balance at end of period related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

3,510

 

 

$

34

 

 

$

920

 

 

$

4,464

 

Loans collectively evaluated for impairment

 

 

21,115

 

 

 

2,246

 

 

 

8,312

 

 

 

31,673

 

Ending balance

 

$

24,625

 

 

$

2,280

 

 

$

9,232

 

 

$

36,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan balances at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

11,854

 

 

$

38,577

 

 

$

1,122

 

 

$

51,553

 

Loans collectively evaluated for impairment

 

 

1,016,595

 

 

 

109,349

 

 

 

168,410

 

 

 

1,294,354

 

Ending balance

 

$

1,028,449

 

 

$

147,926

 

 

$

169,532

 

 

$

1,345,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

21,213

 

 

$

1,990

 

 

$

11,602

 

 

$

34,805

 

Charge-offs

 

 

(77

)

 

 

(98

)

 

 

(3,548

)

 

 

(3,723

)

Recoveries

 

 

173

 

 

 

-

 

 

 

1,367

 

 

 

1,540

 

Provision

 

 

1,992

 

 

 

453

 

 

 

2,980

 

 

 

5,425

 

Ending balance

 

$

23,301

 

 

$

2,345

 

 

$

12,401

 

 

$

38,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance balance at end of period related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

3,504

 

 

$

50

 

 

$

1,048

 

 

$

4,602

 

Loans collectively evaluated for impairment

 

 

19,797

 

 

 

2,295

 

 

 

11,353

 

 

 

33,445

 

Ending balance

 

$

23,301

 

 

$

2,345

 

 

$

12,401

 

 

$

38,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan balances at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

61,043

 

 

$

2,922

 

 

$

1,207

 

 

$

65,172

 

Loans collectively evaluated for impairment

 

 

1,000,889

 

 

 

132,150

 

 

 

172,700

 

 

 

1,305,739

 

Ending balance

 

$

1,061,932

 

 

$

135,072

 

 

$

173,907

 

 

$

1,370,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

18

 

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

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

$

2,610

 

 

$

12,176

 

 

$

6,549

 

 

$

-

 

 

$

21,335

 

 

$

225,676

 

 

$

247,011

 

Commercial mortgage

 

 

5,756

 

 

 

188

 

 

 

4,293

 

 

 

150

 

 

 

10,387

 

 

 

762,046

 

 

 

772,433

 

Commercial construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,443

 

 

 

8,443

 

Commercial agriculture

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

562

 

 

 

562

 

Total commercial

 

 

8,366

 

 

 

12,364

 

 

 

10,842

 

 

 

150

 

 

 

31,722

 

 

 

996,727

 

 

 

1,028,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

2,328

 

 

 

1,246

 

 

 

443

 

 

 

4

 

 

 

4,021

 

 

 

141,359

 

 

 

145,380

 

Home equity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,546

 

 

 

2,546

 

Automobile

 

 

198

 

 

 

92

 

 

 

-

 

 

 

73

 

 

 

363

 

 

 

17,826

 

 

 

18,189

 

Other consumer 1

 

 

1,421

 

 

 

964

 

 

 

106

 

 

 

828

 

 

 

3,319

 

 

 

148,024

 

 

 

151,343

 

Total consumer

 

 

3,947

 

 

 

2,302

 

 

 

549

 

 

 

905

 

 

 

7,703

 

 

 

309,755

 

 

 

317,458

 

Total

 

$

12,313

 

 

$

14,666

 

 

$

11,391

 

 

$

1,055

 

 

$

39,425

 

 

$

1,306,482

 

 

$

1,345,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

19

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

(Dollars in thousands)

 

Non-accrual loans:

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

Commercial & industrial

 

$

7,101

 

 

$

7,610

 

Commercial mortgage

 

 

5,956

 

 

 

8,148

 

Total commercial

 

 

13,057

 

 

 

15,758

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

Residential mortgage

 

$

2,814

 

 

$

1,660

 

Other consumer 1

 

 

158

 

 

 

152

 

Total consumer

 

 

2,972

 

 

 

1,812

 

Total non-accrual loans

 

$

16,029

 

 

$

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.

20

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.

21

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 September 30, 2022, and December 31, 2021:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

(Dollars in thousands)

 

Pass:

 

 

 

 

 

 

 

 

Commercial & industrial

 

$

213,369

 

 

$

266,300

 

Commercial mortgage

 

 

717,216

 

 

 

642,835

 

Commercial construction

 

 

8,443

 

 

 

23,588

 

Commercial agriculture

 

 

562

 

 

 

592

 

Residential mortgage

 

 

142,103

 

 

 

133,176

 

Home equity

 

 

2,546

 

 

 

2,232

 

Automobile

 

 

18,116

 

 

 

18,179

 

Other consumer

 

 

150,357

 

 

 

145,190

 

Total pass loans

 

 

1,252,712

 

 

 

1,232,092

 

 

 

 

 

 

 

 

 

 

Special Mention:

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

1,081

 

 

 

9,760

 

Commercial mortgage

 

 

40,811

 

 

 

11,051

 

Total special mention loans

 

 

41,892

 

 

 

20,811

 

 

 

 

 

 

 

 

 

 

Substandard:

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

26,261

 

 

 

12,645

 

Commercial mortgage

 

 

13,764

 

 

 

44,661

 

Residential mortgage

 

 

2,515

 

 

 

613

 

Other consumer

 

 

-

 

 

 

2

 

Total substandard loans

 

 

42,540

 

 

 

57,921

 

 

 

 

 

 

 

 

 

 

Formula Classified:

 

 

 

 

 

 

 

 

Residential mortgage

 

 

762

 

 

 

1,588

 

Automobile

 

 

73

 

 

 

41

 

Other consumer

 

 

986

 

 

 

1,016

 

Total formula classified loans

 

 

1,821

 

 

 

2,645

 

 

 

 

 

 

 

 

 

 

Doubtful:

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

6,300

 

 

 

7,130

 

Commercial mortgage

 

 

642

 

 

 

722

 

Total doubtful loans

 

 

6,942

 

 

 

7,852

 

Total outstanding loans, gross

 

$

1,345,907

 

 

$

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.

22

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

(Dollars in thousands)

 

Impaired loans:

 

 

 

 

 

 

 

 

Restructured loans:

 

 

 

 

 

 

 

 

Non-accruing restructured loans

 

$

4,328

 

 

$

6,083

 

Accruing restructured loans

 

 

33,584

 

 

 

32,595

 

Total restructured loans

 

 

37,912

 

 

 

38,678

 

Other impaired loans

 

 

13,641

 

 

 

13,105

 

Total impaired loans

 

$

51,553

 

 

$

51,783

 

 

 

 

 

 

 

 

 

 

Impaired loans less than 90 days delinquent

   and included in total impaired loans

 

$

39,107

 

 

$

38,398

 

 

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

 

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

 

(Dollars in thousands)

 

September 30, 2022, with no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

$

11,820

 

 

$

11,943

 

 

$

11,529

 

 

$

34

 

Commercial mortgage

 

 

35,074

 

 

 

35,641

 

 

 

35,656

 

 

 

149

 

Residential mortgage

 

 

2,515

 

 

 

2,515

 

 

 

1,601

 

 

 

10

 

Other consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total impaired loans with no related allowance

 

$

49,409

 

 

$

50,099

 

 

$

48,786

 

 

$

193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022, with a related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

$

96

 

 

$

96

 

 

$

230

 

 

$

-

 

Commercial mortgage

 

 

168

 

 

 

183

 

 

 

151

 

 

 

-

 

Residential mortgage

 

 

821

 

 

 

831

 

 

 

964

 

 

 

-

 

Automobile

 

 

73

 

 

 

73

 

 

 

72

 

 

 

1

 

Other consumer

 

 

986

 

 

 

986

 

 

 

1,053

 

 

 

11

 

Total impaired loans with a related allowance

 

$

2,144

 

 

$

2,169

 

 

$

2,470

 

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

23

 

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 $37.9 million of troubled debt restructurings (“TDRs”) as of September 30, 2022, down by $767 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 September 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

 

 

September 30, 2022

 

 

December 31, 2021

 

Performing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Commercial & industrial

 

 

8

 

 

 

5,734

 

 

 

-

 

 

 

5,734

 

 

 

4,685

 

 

 

3,696

 

Commercial mortgage

 

 

1

 

 

 

28,899

 

 

 

-

 

 

 

28,899

 

 

 

28,899

 

 

 

28,899

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total performing

 

 

9

 

 

 

34,633

 

 

 

-

 

 

 

34,633

 

 

 

33,584

 

 

 

32,595

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

1

 

 

 

176

 

 

 

-

 

 

 

176

 

 

 

67

 

 

 

142

 

Commercial mortgage

 

 

6

 

 

 

5,954

 

 

 

-

 

 

 

5,954

 

 

 

4,261

 

 

 

5,941

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total nonperforming

 

 

7

 

 

 

6,130

 

 

 

-

 

 

 

6,130

 

 

 

4,328

 

 

 

6,083

 

Total Troubled Debt

   Restructurings

 

 

16

 

 

$

40,763

 

 

$

-

 

 

$

40,763

 

 

$

37,912

 

 

$

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 $3.0 million at September 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 was one default on troubled debt restructurings following the modification during the nine months ended September 30, 2022 and 2021.

The Bank has one significant borrowing relationship in bankruptcy totaling $6.3 million at September 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.

 

 

24

 

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 September 30, 2022 and December 31, 2021, the Bank met all capital adequacy requirements to which it is subject.

As of September 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 September 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 September 30, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk

   Weighted Assets)

 

$

232,755

 

 

 

15.057

%

 

$

123,664

 

 

 

8.000

%

 

$

154,580

 

 

 

10.000

%

Tier 1 Capital (to Risk

   Weighted Assets)

 

$

178,884

 

 

 

11.572

%

 

$

92,748

 

 

 

6.000

%

 

$

123,664

 

 

 

8.000

%

Tier 1 Capital (to Average

   Assets)

 

$

178,884

 

 

 

6.668

%

 

$

107,301

 

 

 

4.000

%

 

$

134,127

 

 

 

5.000

%

Common Equity Tier 1

   Capital (to Risk Weighted

   Assets)

 

$

169,102

 

 

 

10.939

%

 

$

69,561

 

 

 

4.500

%

 

$

100,477

 

 

 

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.

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.

25

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Commitments to extend credit

 

$

167,117

 

 

$

162,569

 

 

 

 

 

 

 

 

 

 

Letters of credit:

 

 

 

 

 

 

 

 

Standby letters of credit

 

$

50,263

 

 

$

43,239

 

Commercial letters of credit

 

 

2,034

 

 

 

2,366

 

Total

 

$

52,297

 

 

$

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 September 30, 2022, the maximum undiscounted future payments that the Bank could be required to make for all outstanding letters of credit were $52.3 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 $53 thousand in reserve liabilities associated with these guarantees at September 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 September 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 $32.3 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.

 

26

 

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.

27

Financial assets measured at fair value on a recurring basis as of September 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 September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury notes and bonds

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

U.S. government agency and government

   sponsored enterprise (GSE) debt securities

 

 

-

 

 

 

92,819

 

 

 

-

 

 

 

92,819

 

U.S. government agency pool securities

 

 

-

 

 

 

64,521

 

 

 

-

 

 

 

64,521

 

U.S. government agency or GSE

 

 

-

 

 

 

341,895

 

 

 

-

 

 

 

341,895

 

Total fair value of available-for-sale securities

 

 

-

 

 

 

499,235

 

 

 

-

 

 

 

499,235

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MSRs

 

 

-

 

 

 

-

 

 

 

1,640

 

 

 

1,640

 

Total fair value

 

$

-

 

 

$

499,235

 

 

$

1,640

 

 

$

500,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2022 and December 31, 2021.

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Beginning balance

 

$

1,581

 

 

$

1,683

 

Realized and unrealized net losses:

 

 

 

 

 

 

 

 

Included in net income

 

 

59

 

 

 

(102

)

Ending balance

 

$

1,640

 

 

$

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.

28

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

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MSRs

 

$

1,640

 

 

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 September 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 September 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 September 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.

29

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 September 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 September 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 September 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 September 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.

30

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)

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

265,013

 

 

$

265,013

 

 

$

-

 

 

$

-

 

Restricted cash

 

 

150

 

 

 

150

 

 

 

-

 

 

 

-

 

Federal Home Loan Bank stock

 

 

3,318

 

 

 

-

 

 

 

3,318

 

 

 

-

 

Investment securities held-to-maturity

 

 

317,593

 

 

 

-

 

 

 

240,329

 

 

 

-

 

Loans, net

 

 

1,306,888

 

 

 

-

 

 

 

-

 

 

 

1,353,473

 

Total

 

$

1,892,962

 

 

$

265,163

 

 

$

243,647

 

 

$

1,353,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,351,149

 

 

 

-

 

 

 

-

 

 

 

2,352,752

 

Total

 

$

2,351,149

 

 

$

-

 

 

$

-

 

 

$

2,352,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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