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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

 

 

$

313,186

 

 

$

1,330,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,533,231

 

 

$

-

 

 

$

-

 

 

$

2,527,806

 

Total

 

$

2,533,231

 

 

$

-

 

 

$

-

 

 

$

2,527,806

 

 

Note 11 – Comprehensive Income (Loss)

 

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Net unrealized (loss) gain on available-for-sale securities

 

$

(86,089

)

 

$

(5,857

)

Amounts reclassified from AOCI for (gain) on sale of investment

   securities available-for-sale included in net income

 

 

-

 

 

 

(272

)

Tax effect

 

 

19,384

 

 

 

1,380

 

Unrealized holding (loss) gain on available-for-sale securities, net of tax

 

 

(66,705

)

 

 

(4,749

)

Gross unrealized holding loss on held-to-maturity securities

 

 

(11,972

)

 

 

(15,864

)

Amortization of unrealized holding loss on held-to-maturity during the

   period

 

 

645

 

 

 

3,892

 

Unrealized holding loss on held-to-maturity securities

 

 

(11,327

)

 

 

(11,972

)

Accumulated other comprehensive (loss) income

 

$

(78,032

)

 

$

(16,721

)

 

 

Note 12 – Leases

 

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

31

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

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

The Bank leases certain facilities from two separate entities in which two of its directors have separate ownership interests. Lease payments made to these entities during the nine months ended September 30, 2022 and 2021 approximated $291 thousand and $302 thousand, respectively. During the three months ended September 30, 2022 and 2021, lease payments made to these entities approximated $129 thousand and $97 thousand, respectively.

Additionally, the Bank leases office space to third parties, with original lease terms ranging from 1 to 3 years with option periods ranging up to 12 years. At September 30, 2022, minimum future rents to be received under non-cancelable operating sublease agreements were $11 thousand and $29 thousand for the years ending December 31, 2022 and 2023, respectively.

The cash flow from operating leases included in the measurement of lease liabilities during the nine months ended September 30, 2022 and 2021 were $2.1 million and $2.7 million, respectively.

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

27,846

 

 

$

23,379

 

Total lease assets

 

$

27,846

 

 

$

23,379

 

Liabilities

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

Operating

 

$

1,932

 

 

$

1,926

 

Noncurrent

 

 

 

 

 

 

 

 

Operating

 

 

26,905

 

 

 

22,186

 

Total lease liabilities

 

$

28,837

 

 

$

24,112

 

 

The operating lease costs and variable lease costs were $841 thousand and $2.4 million during the three and nine months ended September 30, 2022, respectively, and $911 thousand and $2.8 million during the three and nine months ended September 30, 2021, respectively.   

 

The following table provides the maturities of lease liabilities at September 30, 2022:

 

 

 

Operating

Leases (a)

 

 

Total

 

2022

 

$

767

 

 

$

767

 

2023

 

 

2,893

 

 

 

2,893

 

2024

 

 

2,880

 

 

 

2,880

 

2025

 

 

2,824

 

 

 

2,824

 

2026

 

 

2,614

 

 

 

2,614

 

2027

 

 

2,282

 

 

 

2,282

 

After 2027

 

 

39,642

 

 

 

39,642

 

Total lease payments

 

 

53,902

 

 

 

53,902

 

Less: Interest (b)

 

 

25,065

 

 

 

25,065

 

Present value of lease liabilities (c)

 

$

28,837

 

 

$

28,837

 

 

Note: For leases commencing prior to 2019, minimum lease payments exclude payments to landlords for real estate taxes and common area maintenance.

 

(a)

Operating lease payments include $18.9 million related to options to extend lease terms that are reasonably certain of being exercised.

 

(b)

Calculated using the incremental borrowing rate based on the lease term for each lease.

 

(c)

Includes the current portion of $1.9 million for operating leases.

 

32

 

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Weighted-average remaining lease term (years)

 

 

 

 

 

 

 

 

Operating leases

 

 

26.0

 

 

 

25.6

 

Weighted-average discount rate

 

 

 

 

 

 

 

 

Operating leases

 

 

4.03

%

 

 

4.15

%

 

 

Note 13 – Subordinated Debt

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

The 2031 Notes have a ten-year term and initially bear interest at a fixed annual rate of 4.75%. Beginning July 1, 2026, the interest rate will reset quarterly to the then-current three-month Secured Overnight Financing Rate (“SOFR”) plus 413 basis points. The Company is required to pay interest semi-annually during the fixed period, and quarterly during the floating rate period. The principal sum of the 2031 Notes plus any unpaid interest are due on the maturity date.

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

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

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

Note 14 – Subsequent Events

 

Management has reviewed the events occurring through the date of this report, and there were no subsequent events that require additional disclosure to the accompanying financial statements except as set forth below:

 

Reverse Stock Split

On October 31, 2022, the Company effected a 1-for-500 shares reverse stock split of outstanding shares of its common stock. Share and per share amounts reported as of and prior to September 30, 2022 in the condensed consolidated financial statements and notes do not reflect the adjusted share and per share amounts that were effective on and after November 2, 2022, unless otherwise noted.

 

 

 

 

 

33

 

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

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of the Company and its wholly-owned subsidiaries, the Bank and BGIS. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of operations. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes presented elsewhere in this Quarterly Report.

Overview

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

In August 2015, the Company chartered a second subsidiary, BankGuam Investment Services (“BGIS”), in an effort to enhance the options and opportunities of our customers to build future income and wealth. BGIS is a registered investment company, primarily involved in providing investment advisory services and trading securities for its customers.

In May 2016, the Company entered into a Stock Purchase Agreement (the “Agreement”) to acquire up to 70% of ASC Trust LLC, formerly ASC Trust Corporation, a Guam trust company. In July 2016, subsequent to the approval of the Federal Reserve Bank of San Francisco in June 2016, the first purchase of 25% of ASC Trust LLC was completed. In July 2019, the Company completed the second purchase of an additional 20% of ASC Trust LLC, bringing its ownership to 45%. As stated in Note 4 – Investment Securities, and with the approval of the Federal Reserve Bank of San Francisco, an additional 25% of ASC Trust LLC was purchased by the Company in July 2021. This transaction brought the Company’s ownership of ASC Trust LLC to 70%, and completes the transactions contemplated by the Agreement. The Company evaluated its ownership in ASC Trust LLC after the last transaction in accordance to ASC 810 – Consolidation, and determined that the Company has control over ASC Trust LLC requiring consolidation. ASC Trust LLC is primarily involved in administering 401(k) retirement plans and other employee benefit programs for its customers.

Other than holding the shares of the Bank, BGIS and ASC Trust LLC, the Company conducts no significant activities, although it is authorized, with the prior approval of its principal regulator, the Board of Governors of the Federal Reserve System, to engage in a variety of activities related to the business of banking. Currently, substantially all of the Company’s operations are conducted and substantially all of its assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses and operating income. The Bank’s headquarters is located in Hagåtña, Guam, and the Bank provides a variety of financial services to individuals, businesses and government entities through its branch network. The Bank’s primary deposit products are demand deposits, savings and time certificates of deposit, and its primary lending products are consumer, commercial and real estate loans. The Bank also provides many other financial services to its customers. In 2021, the Bank permanently closed the Dededo, Harmon and Chalan Piao branches. The Bank has been adding digital channels to its product delivery system for several years. The COVID-19 pandemic accelerated the adoption of those digital channels by our customers, which was considered in our decision to close those branches.

The COVID-19 pandemic and resulting governmental responses impacted our operations in 2022 and 2021.See “Note 2 – Summary of Significant Accounting Policies – COVID-19” for discussion.

 

34

 

Summary of Operating Results

The following table provides unaudited comparative information with respect to our results of operations for the three and nine months ended September 30, 2022 and 2021, respectively:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

Amount

 

 

2021

Amount

 

 

%

Change

 

 

2022

Amount

 

 

2021

Amount

 

 

%

Change

 

Interest income

 

$

24,033

 

 

$

20,896

 

 

 

15.0

%

 

$

66,873

 

 

$

61,601

 

 

 

8.6

%

Interest expense

 

 

516

 

 

 

600

 

 

 

-14.0

%

 

 

1,542

 

 

 

1,310

 

 

 

17.7

%

Net interest income, before

   provision for loan losses

 

 

23,517

 

 

 

20,296

 

 

 

15.9

%

 

 

65,331

 

 

 

60,291

 

 

 

8.4

%

Provision for loan losses

 

 

1,425

 

 

 

2,475

 

 

 

-42.4

%

 

 

4,275

 

 

 

5,425

 

 

 

-21.2

%

Net interest income, after

   provision for loan losses

 

 

22,092

 

 

 

17,821

 

 

 

24.0

%

 

 

61,056

 

 

 

54,866

 

 

 

11.3

%

Non-interest income

 

 

8,636

 

 

 

10,343

 

 

 

-16.5

%

 

 

24,554

 

 

 

20,028

 

 

 

22.6

%

Non-interest expense

 

 

24,018

 

 

 

21,290

 

 

 

12.8

%

 

 

69,444

 

 

 

56,550

 

 

 

22.8

%

Income before income taxes

 

 

6,710

 

 

 

6,874

 

 

 

-2.4

%

 

 

16,166

 

 

 

18,344

 

 

 

-11.9

%

Income tax expense

 

 

1,388

 

 

 

1,311

 

 

 

5.9

%

 

 

3,201

 

 

 

3,576

 

 

 

-10.5

%

Net income

 

$

5,322

 

 

$

5,563

 

 

 

-4.3

%

 

$

12,965

 

 

$

14,768

 

 

 

-12.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share (EPS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted EPS

 

$

0.51

 

 

$

0.53

 

 

 

 

 

 

$

1.22

 

 

$

1.45

 

 

 

 

 

 

As the above table indicates, our net income decreased in the three and nine months ended September 30, 2022, as compared to the corresponding periods in 2021. In the three months ended September 30, 2022, we recorded net income after taxes of $5.3 million, a decrease of $241 thousand (or 4.3%) as compared to the same period in 2021. The primary reasons for the decrease were the $1.7 million decrease in non-interest income and a $2.7 million increase in non-interest expense, partially offset by a $4.3 million increase in net interest income. The increase in non-interest expense is largely due to the increase of $2.8 million in technology, equipment, and depreciation and a $760 thousand increase in general and administrative expenses partially offset by a decrease of $798 thousand in contract services.

    

The decrease in non-interest income is largely due the $3.4 million gain recorded in the corresponding period in 2021 for the valuation of the pre-existing interest in ASC, partially offset by the $725 thousand increase in trust revenue, $599 thousand increase in service chares and fees and $382 thousand increase in carholder and merchant net income.

    

In the nine months ended September 30, 2022, we recorded $13.0 million in net income, a decrease of $1.8 million (or 12.2%) from $14.8 million during the same period in 2021 .  The primary reasons for the decrease were an increase of $12.9 million in non-interest expense, partially offset by the $4.5 million increase to non-interest income and a $6.2 million increase to net interest income. The increase in non-interest expense is largely due to the increase of $7.5 million in technology, equipment, and depreciation, the $2.0 million increase in salaries and employee benefits, the $710 thousand increase to training and education, and the $3.2 million increase in general and administrative expenses to include $757 thousand increase related to ASC Trust LLC and the $810 thousand increase to sundry losses.

 

The increase in non-interest income is primarily due to the $7.6 million increase service charges and fees, primarily due to the fee income from ASC Trust LLC, the $812 thousand increase in cardholder and merchant net income, and the $1.2 million increase in trustee fees, partially offset by the $4.9 million decrease in other income. The decrease in non-interest income is largely due the $3.4 million gain recorded in the corresponding period in 2021 for the valuation of the pre-existing interest in ASC.

 

The following table shows the increase in our net interest margin in the three and nine months ended September 30, 2022, and it also indicates the impact that the increase in our net income had on our annualized returns on average assets and average equity. During the three and nine months ended September 30, 2022, our return on average equity increase by 2.75% and decreased by 2.28%, respectively as compared to the corresponding period in 2021, and our return on average assets increased by 6 basis points and decreased by 26 basis points, respectively, during the same comparative period.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net interest margin

 

 

3.90

%

 

 

2.86

%

 

 

3.47

%

 

 

3.04

%

Return on average assets

 

 

0.81

%

 

 

0.75

%

 

 

0.80

%

 

 

1.06

%

Return on average equity

 

 

15.07

%

 

 

12.32

%

 

 

14.86

%

 

 

17.14

%

 

35

 

Critical Accounting Policies

The Company’s significant accounting policies are set forth in Note 2 in the Notes to the Company’s Annual Report on Form 10-K for 2021 filed with the SEC on March 28, 2022, and Note 2 of Item 1 in this report. Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and general practices in the banking industry. Certain of those accounting policies are considered critical accounting policies because they require us to make assumptions and judgments regarding circumstances or trends that could affect the carrying values of our material assets, such as assumptions regarding economic conditions or trends that could impact our ability to fully collect our outstanding loans or ultimately realize the carrying values of certain of our other assets, such as securities that are available for sale. If adverse changes were to occur in the events, trends or other circumstances on which our assumptions or judgments have been based, or other unanticipated events were to happen that might affect our operating results, it could become necessary under GAAP for us to reduce the carrying values of the affected assets in our condensed consolidated statements of financial condition. In addition, because reductions in the carrying values of assets are sometimes effectuated by or require charges to income, such reductions also may have the effect of reducing our income.

 

Results of Operations

Net Interest Income

Net interest income, the primary component of the Bank’s income, refers to the difference between the interest earned on loans, investment securities and other interest-earning assets, and the interest paid on deposits and other borrowed funds. Our interest income and interest expense are affected by a number of factors, some of which are outside of our control, including national and local economic conditions, the monetary policies of the Federal Reserve’s Open Market Committee which affect interest rates, competition in the marketplace for loans and deposits, the demand for loans and the ability of borrowers to meet their payment obligations. Net interest income, when expressed as a percentage of average earning assets, is a banking organization’s “net interest margin.”

The following table sets forth our interest income, interest expense and net interest income, and our annualized net interest margin for the three and nine months ended September 30, 2022 and 2021, respectively:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

%

Change

 

 

2022

 

 

2021

 

 

%

Change

 

Interest income

 

 

24,033

 

 

$

20,896

 

 

 

15.01

%

 

$

66,873

 

 

$

61,601

 

 

 

8.56

%

Interest expense

 

 

516

 

 

 

600

 

 

 

-14.00

%

 

 

1,541

 

 

 

1,310

 

 

 

17.63

%

Net interest income

 

 

23,517

 

 

$

20,296

 

 

 

15.87

%

 

$

65,332

 

 

$

60,291

 

 

 

8.36

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.90

%

 

 

2.86

%

 

 

1.04

%

 

 

3.47

%

 

 

3.04

%

 

 

0.42

%

 

Net interest income increased by 15.87% and 8.36%, respectively for the three and nine months ended September 30, 2022 as compared to the corresponding period in 2021.

For the three months ended September 30, 2022, net interest income increased by $3.2 million and $5.0 million, respectively,  as compared to the same period in 2021. Total interest income increased by $3.1 million due to increases of $1.1 million in earnings from short term investments, $1.0 million from investment securities, and $1.0 million from loans during the three months ended September 30, 2022, compared to the previous year. The increase in our net interest margin was the result of an increase of 1.05% in the yield on our average earning assets in the three months ended September 30, 2022, as compared to the corresponding period of 2021, the effect of which was compounded by a decrease in the yield on our average earning liabilities by 0.02%, compared to the same comparative period. 

Total interest income increased by $5.3 million in the nine months ended September 30, 2022, compared to the previous year due to increases of $3.0 million in earnings on investment securities, $1.8 million from short term investments and $496 thousand from loans during the nine months ended September 30, 2022, compared to the same comparative period in the previous year.

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 econcomic conditions as well as accelerating inflation resulted in the FOMC increasing the target range by a total of 300 bps; 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, by 75bps 2.25% to 2.50% on July 27, 2022 and 75bps to 3.00% - 3.25% on September 22, 2022. The increase in interest rates is expected to have a positive impact to the Company’s net interest income as loans and securities reprice.

36

Average Balances

Distribution, Rate and Yield

The following table sets forth information regarding our average balance sheet, annualized yields on interest-earning assets and interest rates on interest-bearing liabilities, the interest rate spread and the interest rate margin for the three and nine months ended September 30, 2022 and 2021:

 

 

 

Three Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

Average

Balance

 

 

Interest

Earned/Paid

 

 

Average

Yield/Rate

 

 

Average

Balance

 

 

Interest

Earned/Paid

 

 

Average

Yield/Rate

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short term investments1

 

$

265,410

 

 

$

1,397

 

 

 

2.11

%

 

$

759,864

 

 

$

294

 

 

 

0.15

%

Investment Securities²

 

 

844,156

 

 

 

3,605

 

 

 

1.71

%

 

 

708,522

 

 

 

2,591

 

 

 

1.46

%

Loans³

 

 

1,302,286

 

 

 

19,031

 

 

 

5.85

%

 

 

1,373,838

 

 

 

18,011

 

 

 

5.24

%

Total earning assets

 

 

2,411,852

 

 

 

24,033

 

 

 

3.99

%

 

 

2,842,224

 

 

 

20,896

 

 

 

2.94

%

Noninterest earning assets

 

 

208,196

 

 

 

 

 

 

 

 

 

 

 

138,897

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,620,048

 

 

 

 

 

 

 

 

 

 

$

2,981,121

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking accounts

 

$

380,939

 

 

$

9

 

 

 

0.01

%

 

$

332,811

 

 

$

25

 

 

 

0.03

%

Savings accounts

 

 

1,094,632

 

 

 

28

 

 

 

0.01

%

 

 

1,150,710

 

 

 

87

 

 

 

0.03

%

Certificates of deposit

 

 

25,469

 

 

 

3

 

 

 

0.05

%

 

 

29,500

 

 

 

7

 

 

 

0.09

%

Subordinated debt

 

 

35,000

 

 

 

476

 

 

 

5.44

%

 

 

34,377

 

 

 

481

 

 

 

5.60

%

Total interest-bearing liabilities

 

 

1,536,040

 

 

 

516

 

 

 

0.13

%

 

 

1,547,398

 

 

 

600

 

 

 

0.16

%

Non-interest bearing liabilities

 

 

942,741

 

 

 

 

 

 

 

 

 

 

 

1,253,163

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

2,478,781

 

 

 

 

 

 

 

 

 

 

 

2,800,561

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

141,267

 

 

 

 

 

 

 

 

 

 

 

180,560

 

 

 

 

 

 

 

 

 

Total liabilities and

   stockholders’ equity

 

$

2,620,048

 

 

 

 

 

 

 

 

 

 

$

2,981,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

23,517

 

 

 

 

 

 

 

 

 

 

$

20,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

3.85

%

 

 

 

 

 

 

 

 

 

 

2.79

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.90

%

 

 

 

 

 

 

 

 

 

 

2.86

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

Average

Balance

 

 

Interest

Earned/Paid

 

 

Average

Yield/Rate

 

 

Average

Balance

 

 

Interest

Earned/Paid

 

 

Average

Yield/Rate

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short term investments1

 

$

354,304

 

 

$

2,286

 

 

 

0.86

%

 

$

609,043

 

 

$

508

 

 

 

0.11

%

Investment securities²

 

 

856,456

 

 

 

10,188

 

 

 

1.59

%

 

 

631,406

 

 

 

7,190

 

 

 

1.52

%

Loans³

 

 

1,296,674

 

 

 

54,399

 

 

 

5.59

%

 

 

1,402,040

 

 

 

53,903

 

 

 

5.13

%

Total earning assets

 

 

2,507,434

 

 

 

66,873

 

 

 

3.56

%

 

 

2,642,489

 

 

 

61,601

 

 

 

3.11

%

Noninterest earning assets

 

 

186,576

 

 

 

 

 

 

 

 

 

 

 

131,813

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,694,010

 

 

 

 

 

 

 

 

 

 

$

2,774,302

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking accounts

 

$

384,407

 

 

$

29

 

 

 

0.01

%

 

$

334,166

 

 

$

74

 

 

 

0.03

%

Savings accounts

 

 

1,144,933

 

 

 

85

 

 

 

0.01

%

 

 

1,123,880

 

 

 

252

 

 

 

0.03

%

Certificates of deposit

 

 

26,908

 

 

 

11

 

 

 

0.05

%

 

 

29,004

 

 

 

27

 

 

 

0.12

%

Subordinated debt

 

 

26,250

 

 

 

1,416

 

 

 

7.19

%

 

 

23,533

 

 

 

957

 

 

 

5.42

%

Total interest-bearing liabilities

 

 

1,582,498

 

 

 

1,541

 

 

 

0.13

%

 

 

1,510,583

 

 

 

1,310

 

 

 

0.12

%

Non-interest bearing liabilities

 

 

954,443

 

 

 

 

 

 

 

 

 

 

 

1,091,420

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

2,536,941

 

 

 

 

 

 

 

 

 

 

 

2,602,003

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

157,069

 

 

 

 

 

 

 

 

 

 

 

172,299

 

 

 

 

 

 

 

 

 

Total liabilities and

   stockholders’ equity

 

$

2,694,010

 

 

 

 

 

 

 

 

 

 

$

2,774,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

65,332

 

 

 

 

 

 

 

 

 

 

$

60,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

3.43

%

 

 

 

 

 

 

 

 

 

 

2.99

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.47

%

 

 

 

 

 

 

 

 

 

 

3.04

%

 

 

1

Short term investments consist of interest-bearing deposits that we maintain with other financial institutions.

37

 

 

2

Includes all investment securities in the Available-for-Sale and the Held-to-Maturity classifications. The Bank did not own any tax exempt securities during 2022 and 2021.

 

3

Loans include the average balance of non-accrual loans. Loan interest income includes loan fees of $611 thousand and $1.8 million in the three and nine months ended September 30, 2022, respectively, and $884 thousand and $3.1 million in the three and nine months ended September 30, 2021, respectively.

For the three and nine months ended September 30, 2022, our total average earning assets decreased by $430.4 million and $135.1 million, respectively, as compared to the same period in 2021. The decrease during the three months ended September 30, 2022, compared to the same period in 2021, is attributed to the $494.5 million decrease in our average short term investments and a $71.6 million decrease in our average loan portfolio, partially offset by a $135.6 million increase in our average investment securities. Average noninterest earning assets increased by $69.3 million. In the three and nine months ended September 30, 2022, average total interest-bearing liabilities decreased by $11.4 million and increased by $71.9 million, respectively, in comparison to the same period in 2021. In the three months ended September 30, 2022, the decrease was comprised of the $56.1 million decrease in average savings accounts and a $4.0 million decrease in average certificate of deposit accounts, partially offset by a $48.1 million increase in average interest-bearing checking accounts. During the three months ended September 30, 2022, average stockholders’ equity decreased by $39.3 million (21.8%)  in comparison to the year-earlier period due to decrease in accumulated other comprehensive loss, due to the increase in market rates.

Our interest rate spread increased by 44 basis points (14.49%), and our net interest margin also increased by 43 basis points (14.20%) in the nine months ended September 30, 2022, as compared to the same period in 2021. During the nine months ended September 30, 2022, the increase in our interest rate spread is attributed to the 45 basis points (14.41%) increase in the average yield on our interest earning assets, from 3.11% to 3.56%, and the increase in the average rate on our interest-bearing liabilities by 1 basis points from 0.12% to 0.13%. The increase in our interest income is primarily due to the 25 bps rate hike in March 2022, 50bps in May 2022, 75 bps in June 2022, 75 bps in July 2022, and another 75 bps in September 2022. by the Federal Open Market Committee. This impacted our loan portfolio, investment securities, and short term deposits in other banks, including the Federal Reserve Bank of San Francisco.

38

The following table provides information regarding the changes in interest income and interest expense, attributable to changes in rates and changes in volumes, that contributed to the total change in net interest income for the three and nine months ended September 30, 2022, in comparison to the three and nine months ended September 30, 2021:

 

 

 

Three Months Ended September 30, 2022 vs. 2021

 

 

 

(In thousands)

 

 

 

Net Change in

 

 

Attributable to:

 

 

 

Interest

Income/Expense

 

 

Change in

Rate

 

 

Change in

Volume

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Short term investments

 

$

1,103

 

 

$

14,822

 

 

$

(13,719

)

Investment securities

 

 

1,014

 

 

 

1,739

 

 

 

(725

)

Loans

 

 

1,020

 

 

 

8,263

 

 

 

(7,243

)

Total interest income

 

 

3,137

 

 

 

24,824

 

 

 

(21,687

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking accounts

 

 

(16

)

 

 

(69

)

 

 

53

 

Savings accounts

 

 

(59

)

 

 

(230

)

 

 

171

 

Certificates of deposit

 

 

(4

)

 

 

(14

)

 

 

10

 

Other borrowings

 

 

(5

)

 

 

(54

)

 

 

49

 

Total interest expense

 

 

(84

)

 

 

(367

)

 

 

283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

3,221

 

 

$

25,191

 

 

$

(21,970

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2022 vs. 2021

 

 

 

(In thousands)

 

 

 

Net Change in

 

 

Attributable to:

 

 

 

Interest

Income/Expense

 

 

Change in

Rate

 

 

Change in

Volume

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Short term investments

 

$

1,778

 

 

$

4,562

 

 

$

(2,784

)

Investment securities

 

 

2,998

 

 

 

428

 

 

 

2,570

 

Loans

 

 

496

 

 

 

6,555

 

 

 

(6,059

)

Total interest income

 

 

5,272

 

 

 

11,545

 

 

 

(6,273

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking accounts

 

 

(45

)

 

 

(65

)

 

 

20

 

Savings accounts

 

 

(167

)

 

 

(225

)

 

 

58

 

Certificates of deposit

 

 

(16

)

 

 

(20

)

 

 

4

 

Other borrowings

 

 

459

 

 

 

417

 

 

 

42

 

Total interest expense

 

 

231

 

 

 

107

 

 

 

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

5,041

 

 

$

11,438

 

 

$

(6,397

)

 

Provision for Loan Losses

We maintain allowances for probable loan losses that are incurred as a normal part of the banking business. As more fully discussed in Note 5 of the notes to the unaudited condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q, an allowance for loan losses has been established by management in order to provide for those loans which, for a variety of reasons, may not be repaid in their entirety. The allowance is maintained at a level considered by management to be adequate to provide for probable losses that are accrued as of the balance sheet date and based on methodologies applied on a consistent basis with the prior year. Management’s review of the adequacy of the allowance includes, among other things, loan growth, changes in the composition of the loan portfolio, an analysis of past loan loss experience and management’s evaluation of the loan portfolio under current economic conditions.

39

The allowance for loan losses is based on estimates, and ultimate losses will vary from current estimates. The Bank recognizes that credit losses will be experienced and the risk of loss will vary with, among other things: general economic conditions; the type of loan being made; the credit worthiness of the borrower over the term of the loan; and, in the case of a collateralized loan, the quality and valuation of the collateral for such loan. The allowance for loan losses represents the Bank’s best estimate of the allowance necessary to provide for probable losses in the portfolio as of the balance sheet date.

If management determines that it is necessary to increase the allowance for loan losses, a provision for loan losses is recorded. For the three months ended September 30, 2022, the Bank’s provision for loan losses was $1.4 million, which was $1.1 million lower than the corresponding period of 2021. The decrease is primarily due to the reduction in the monthly provision for loan losses from $825 thousand to $475 thousand, which were due to the declining risk in the loan portfolio resulting from the decrease in net charge offs, the decrease in the delinquency ratio, and the decrease in non-accrual loans.

For the nine months ended September 30, 2022, the Bank’s provision for loan losses was $4.3 million, which was $1.2 million lower than during the corresponding period of 2021. The decrease is mainly due to the reduction in the monthly provision for loan losses from $825 thousand to $475 thousand. In the three and nine months ended September 30, 2022, management adjusted the economic risk factors to incorporate the current economic conditions, which includes fluctuations in tourism, unemployment due to the COVID-19 pandemic and inflationary concerns.

Management believes that the provision recorded was sufficient to offset the incremental risk of loss inherent in the gross loan portfolio of $1.35 billion at September 30, 2022, an increase of $24.6 million from December 31, 2021. The allowance for loan losses at September 30, 2022, was at $36.1 million or 2.68% of total gross loans outstanding as of the balance sheet date, an increase of $1.7 million from December 31, 2021. We recorded net loan charge-offs of $1.0 million and $2.5 million for the three and nine months ended September 30, 2022, respectively. See “Analysis of Allowance for Loan Losses” in the Financial Condition Section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for more detailed information.

Non-Interest Income

The table below represents the major components of non-interest income and the changes therein for the three and nine months ended September 30, 2022 and 2021:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

Amount

 

 

2021

Amount

 

 

Amount

Change

 

 

Percent

Change

 

 

2022

Amount

 

 

2021

Amount

 

 

Amount

Change

 

 

Percent

Change

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges and fees

 

$

4,935

 

 

$

4,336

 

 

$

599

 

 

 

13.8

%

 

$

15,487

 

 

$

7,843

 

 

$

7,644

 

 

 

97.5

%

Gain on sale of investment securities

 

 

-

 

 

 

10

 

 

 

(10

)

 

 

-100.0

%

 

 

-

 

 

 

281

 

 

 

(281

)

 

 

-100.0

%

Income from merchant services, net

 

 

966

 

 

 

721

 

 

 

245

 

 

 

34.0

%

 

 

2,509

 

 

 

2,127

 

 

 

382

 

 

 

18.0

%

Income from cardholders, net

 

 

1,131

 

 

 

994

 

 

 

137

 

 

 

13.8

%

 

 

2,669

 

 

 

2,239

 

 

 

430

 

 

 

19.2

%

Trustee fees

 

 

861

 

 

 

136

 

 

 

725

 

 

 

533.1

%

 

 

1,676

 

 

 

437

 

 

 

1,239

 

 

 

283.5

%

Other income

 

 

743

 

 

 

4,146

 

 

 

(3,403

)

 

 

-82.1

%

 

 

2,213

 

 

 

7,101

 

 

 

(4,888

)

 

 

-68.8

%

Total non-interest income

 

$

8,636

 

 

$

10,343

 

 

$

(1,707

)

 

 

-16.5

%

 

$

24,554

 

 

$

20,028

 

 

$

4,526

 

 

 

22.6

%

 

For the three months ended September 30, 2022, non-interest income totaled $8.6 million, which represented an decrease of $1.7 million (16.5%) as compared to the three months ended September 30, 2021. The decrease during the three months ended September 30, 2022, is primarily attributed to a $3.4 million decrease in other income, partially offset the increases in income of $725 thousand in trustee fees, $599 thousand from service charges and fees, $245 thousand in net income from merchants, and $137 thousand increase in net income from cardholders. The decrease in non-interest income is largely due the $3.4 million gain recorded in corresponding period in 2021 for the valuation of the pre-existing interest in ASC.

 

 

For the nine months ended September 30, 2022, non-interest income totaled $24.6 million, which was an increase of $4.5 million (22.6%) as compared to the nine months ended September 30, 2021. The increase during the nine months ended September 30, 2022, is primarily attributed the $7.6 million from service charges and fees, of which $5.1 million is from income from ASC Trust LLC, and increases of $1.2 million in trustee fees, $430 thousand net income from cardholders, and $382 thousand in net income from merchant services. This is partially offset by decreases of $281 thousand from gain on sale of investment securities and $4.9 million in other income. The decrease in other income is largely due the $3.4 million gain recorded in corresponding period in 2021 for the valuation of the pre-existing interest in ASC.

 

40

 

Non-interest Expense

The table below represents the major components of non-interest expense and the changes for the three and nine months ended September 30, 2022 and 2021:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

Amount

 

 

2021

Amount

 

 

Amount

Change

 

 

Percent

Change

 

 

2022

Amount

 

 

2021

Amount

 

 

Amount

Change

 

 

Percent

Change

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

9,904

 

 

$

10,086

 

 

$

(182

)

 

 

-1.8

%

 

$

28,745

 

 

$

26,786

 

 

$

1,959

 

 

 

7.3

%

Occupancy

 

 

2,603

 

 

 

2,268

 

 

 

335

 

 

 

14.8

%

 

 

7,267

 

 

 

6,529

 

 

 

738

 

 

 

11.3

%

Technology, equipment and depreciation

 

 

5,973

 

 

 

3,149

 

 

 

2,824

 

 

 

89.7

%

 

 

16,641

 

 

 

9,173

 

 

 

7,468

 

 

 

81.4

%

Insurance

 

 

468

 

 

 

486

 

 

 

(18

)

 

 

-3.7

%

 

 

1,391

 

 

 

1,491

 

 

 

(100

)

 

 

-6.7

%

Telecommunications

 

 

417

 

 

 

419

 

 

 

(2

)

 

 

-0.5

%

 

 

1,271

 

 

 

1,174

 

 

 

97

 

 

 

8.3

%

FDIC insurance assessment

 

 

299

 

 

 

709

 

 

 

(410

)

 

 

-57.8

%

 

 

917

 

 

 

1,569

 

 

 

(652

)

 

 

-41.6

%

Professional services

 

 

661

 

 

 

784

 

 

 

(123

)

 

 

-15.7

%

 

 

2,268

 

 

 

1,976

 

 

 

292

 

 

 

14.8

%

Contract services

 

 

484

 

 

 

1,282

 

 

 

(798

)

 

 

-62.2

%

 

 

1,403

 

 

 

2,622

 

 

 

(1,219

)

 

 

-46.5

%

Other real estate owned

 

 

13

 

 

 

(28

)

 

 

41

 

 

 

-146.4

%

 

 

38

 

 

 

(1

)

 

 

39

 

 

 

-3900.0

%

Stationery and supplies

 

 

203

 

 

 

129

 

 

 

74

 

 

 

57.4

%

 

 

534

 

 

 

202

 

 

 

332

 

 

 

164.4

%

Training and education

 

 

320

 

 

 

93

 

 

 

227

 

 

 

244.1

%

 

 

887

 

 

 

177

 

 

 

710

 

 

 

401.1

%

General, administrative and other

 

 

2,673

 

 

 

1,913

 

 

 

760

 

 

 

39.7

%

 

 

8,082

 

 

 

4,852

 

 

 

3,230

 

 

 

66.6

%

Total non-interest expense

 

$

24,018

 

 

$

21,290

 

 

$

2,728

 

 

 

12.8

%

 

$

69,444

 

 

$

56,550

 

 

$

12,894

 

 

 

22.8

%

 

For the three months ended September 30, 2022, non-interest expense totaled $24.0 million, which was an increase of $2.7 million (12.8%) as compared to the same period in 2021. The increase is attributed to the increases of $2.8 million in technology, equipment and depreciation, $335 thousand in occupancy, $227 thousand in training and education, and $760 thousand in general, administrative and other, partially offset by decreases of $798 thousand in contract services, $410 thousand in FDIC insurance assessment, and $123 thousand in professional services.  

 

For the nine months ended September 30, 2022, non-interest expense totaled $69.4 million, which represented an increase of $12.9 million (22.8%) as compared to the same period in 2021. The increases are primarily attributed to the $7.5 million increase in technology, equipment, and depreciation, $2.0 million increase in salaries and employee benefits, $738 thousand increase in occupancy, $710 thousand increase in training and education, $332 thousand increase in stationery and supplies, $292 thousand increase in professional services, and $3.2 million increase in general, administrative and other expense. These expenses were offset by decreases of $1.2 million in contract services and $652 thousand in the FDIC insurance assessment. The increase in general, administrative and other expenses is due to increases of $810 thousand in sundry losses, $757 thousand in ASC Trust LLC related expenses, $365 thousand in advertising expenses, $258 thousand in public relations expense, and $212 thousand in donation expense.

 

Income Tax Expense

For the three and nine months ended September 30, 2022, the Bank recorded income tax expenses of $1.4 million and $3.2 million, respectively. The expense for the three and nine months ended September 30, 2022, was $77 thousand more and $375 thousand less, respectively, than the income tax expense recorded for the corresponding periods in 2021.  

41

Financial Condition

Assets

As of September 30, 2022 total assets were $2.56 billion, a decrease of 8.13% from $2.79 billion at December 31, 2021. This $226.8 million decrease was comprised largely of the $294.6 million decrease in interest bearing deposits in banks, partially offset by the $5.3 million increase in our net investment securities portfolio, a $38.3 million increase in other assets, a rise of $23.2 million in net loans, and a $2.2 million increase in cash and due from banks. The increases in other assets is primarily due to the increase in deferred tax assets of $21.2 million, bank owned life insurance of $10.2 million and right of use lease asset of $4.5 million. The reduction in assets was associated with the $182.1 million decrease in total deposits and a $61.3 million decrease in accumulated other comprehensive loss due to the increase in market rates, partially offset by a $9.0 million increase in retained earnings and a $7.5 million increase in other liabilities.

Interest-Earning Assets

The following table sets forth the composition of our interest-earning assets at September 30, 2022 as compared to December 31, 2021:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

Variance

 

Interest-earning deposits with financial institutions (including

   restricted cash)

 

$

226,313

 

 

$

520,893

 

 

$

(294,580

)

Federal Home Loan Bank stock, at cost

 

 

3,318

 

 

 

2,814

 

 

 

504

 

Investment securities available-for-sale

 

 

499,235

 

 

 

499,366

 

 

 

(131

)

Investment securities held-to-maturity

 

 

317,593

 

 

 

312,294

 

 

 

5,299

 

Loans, gross

 

 

1,345,906

 

 

 

1,321,321

 

 

 

24,585

 

Total interest-earning assets

 

$

2,392,365

 

 

$

2,656,688

 

 

$

(264,323

)

 

Loans

Commercial & industrial loans are loans to businesses to finance capital purchases and improvements, or to provide cash flow for operations. Commercial mortgage loans include loans secured by real property for purposes such as the purchase or improvement of that property, wherein repayment is derived from the income generated by the real property or from business operations. Residential mortgage loans are loans to consumers to finance the purchase, improvement, or refinance of real property secured by 1-4 family housing units. Consumer loans include loans to individuals to finance personal needs and are either closed- or open-ended loans. Automobile loans fall under the consumer loan category, but the bulk of consumer loans is typically unsecured extensions of credit such as credit card debt and personal signature loans.

A summary of loan balances at September 30, 2022 and December 31, 2021 is as follows:

 

 

 

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.

42

 

At September 30, 2022, total gross loans increased by $24.6 million, to $1.35 billion, from $1.32 billion at December 31, 2021. The increase in loans was attributed to a $9.2 million increase in commercial loans to $1.03 billion at September 30, 2022 from $1.02 billion at December 31, 2021 and a $15.4 million increase in consumer loans to $317.5 million at September 30, 2022 from $302.0 million at December 31, 2021. The underlying increase in commercial loans was attributed to a $73.2 million increase in commercial mortgage, partially offset by decreases in commercial & industrial by $48.8 million and commercial construction by $15.1 million. The underlying increase in consumer loans was primarily due to the increases of $10.0 million in residential mortgage loans and $5.1 million in other consumer loans.

With the passage of the Paycheck Protection Program, administered by the Small Business Administration, the Bank actively participated in assisting its customers with applications for resources through the program. PPP loans have either a two-year or a five-year term and earn interest at 1%. The Bank believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.  The Bank approved and funded over $149 million in PPP loans. At September 30, 2022, the outstanding principal balance of PPP loans was at $3.4 million.  It is the Bank’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Bank could be required to establish an additional allowance for loan loss through additional credit loss expense charged to earnings.

At September 30, 2022, loans outstanding were comprised of approximately 71.96% in variable rate loans and 28.04% in fixed rate loans.

Since it first opened in 1972, the Bank has expanded its operations and its branch network, first in Guam, then in the other islands of our region and in San Francisco, California. In the interests of enhancing performance and stability through market and industry diversification, the Bank has increased its focus on growth in the San Francisco area in recent years, adding personnel with experience and expertise in the Bay Area. The following table provides figures for gross loans in the Bank’s administrative regions for September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Guam

 

$

656,278

 

 

$

684,435

 

Commonwealth of the Northern Mariana Islands

 

 

134,914

 

 

 

135,165

 

The Freely Associated States of Micronesia *

 

 

89,704

 

 

 

89,523

 

California

 

 

465,011

 

 

 

412,198

 

Total

 

$

1,345,907

 

 

$

1,321,321

 

 

 

*

The Freely Associated States (FAS) are comprised of the Federated States of Micronesia (Chuuk, Kosrae, Pohnpei and Yap), the Republic of the Marshall Islands and the Republic of Palau.

As the table indicates, the Bank’s total gross loans increased by 1.86% during the nine months ended September 30, 2022. By way of comparison, loans in the California region increased by $52.8 million, or 12.81%, during the nine months ended September 30, 2022. Loans in the Freely Associated States of Micronesia increased by $181 thousand, or 0.20%, during the same period. In the Guam region loans decreased by $28.2 million, or 4.11% and loans in the Commonwealth of the Northern Mariana Islands decreased by $251 thousand or 0.19%, during the nine months ended September 30, 2022.     

Interest-Earning Deposits and Investment Securities

In the current lending and interest rate environment, and in order to maintain sufficient liquidity in the ordinary course of business, and to account for disbursement of the funds received from the CARES Act, the Bank held $226.2 million in unrestricted interest-earning deposits with financial institutions at September 30, 2022, a decrease of $294.6 million, or 56.6%, from the $520.7 million in such deposits at December 31, 2021. This significant decrease is the result of the disbursement of various funds received from the CARES Act, which were held in cash balances with the Federal Reserve Bank at the end of the reporting period. From December 31, 2021 to September 30, 2022, the Bank’s combined investment portfolio increased by $5.2 million, or 0.6%, from $811.7 million to $816.8 million. The growth in the investment portfolio was comprised of a $5.3 million increase in our holdings of held-to-maturity securities, which increased by 1.7%, from $312.3 million to $317.6 million a $131 thousand decrease in available-for-sale securities, which decreased by 0.03%, from $499.4 million to $499.2 million, and. Management believes that the Bank maintains an adequate level of liquidity.

43

Nonperforming Loans and Other Nonperforming Assets

Nonperforming loans consist of (i) loans on non-accrual status because we have ceased accruing interest on these loans; (ii) loans 90 days or more past due and still accruing interest; and (iii) restructured loans. Other nonperforming assets consist of real estate properties (OREO) that have been acquired through foreclosure or similar means and which management intends to offer for sale. Loans are placed on non-accrual status when, in the opinion of management, the full and timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payment becomes 90 days past due, unless the loan is adequately collateralized and the loan is in the process of collection. When a loan is placed in non-accrual status, accrued but unpaid interest is reversed against current income. Subsequently, when payments are received on such loans, the amounts are applied to reduce principal, except when the ultimate collectability of principal is probable, in which case accrued loans may be restored to accrual status when principal and interest becomes current and full repayment is expected. Interest income is recognized on an accrual basis for impaired loans not meeting the non-accrual criteria.

The following table contains information regarding our nonperforming assets as well as restructured loans as of September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Non-accrual loans:

 

 

 

 

 

 

 

 

Commercial & industrial

 

$

7,101

 

 

$

7,610

 

Commercial mortgage

 

 

5,956

 

 

 

8,148

 

Residential mortgage

 

 

2,814

 

 

 

1,660

 

Other consumer 1

 

 

158

 

 

 

152

 

Total non-accrual loans

 

 

16,029

 

 

 

17,570

 

 

 

 

 

 

 

 

 

 

Loans past due 90 days and still accruing:

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

-

 

 

 

106

 

Commercial mortgage

 

 

150

 

 

 

-

 

Residential mortgage

 

 

4

 

 

 

77

 

Automobile

 

 

73

 

 

 

41

 

Other consumer1

 

 

828

 

 

 

866

 

Total loans past due 90 days and still accruing

 

 

1,055

 

 

 

1,090

 

Total nonperforming loans

 

 

17,084

 

 

 

18,660

 

 

 

 

 

 

 

 

 

 

Restructured loans:

 

 

 

 

 

 

 

 

Accruing loans

 

$

33,584

 

 

$

32,595

 

Non-accruing loans (included in nonaccrual loans above)

 

 

4,328

 

 

 

6,083

 

Total restructured loans

 

$

37,912

 

 

$

38,678

 

 

 

1

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

The above table indicates that nonperforming loans decreased by $1.6 million during the nine months ended September 30, 2022, which resulted from the decrease in total non-accrual loans by $1.6 million, from $17.6 million to $16.0 million. The decrease in total non-accrual loans were due to the decreases of $2.2 million in commercial mortgage and $509 thousand in commercial & industrial loans, partially offset by an increase of $1.2 million in residential mortgage loans.

At September 30, 2022, the Bank’s largest nonperforming loans are five commercial mortgage loans totaling $5.6 million from five relationships of $3.22 million, $723 thousand, $647 thousand, $642 thousand, and $426 thousand, respectively, and one commercial & industrial loan relationship totaling $6.3 million. These loans were placed on non-accrual due to deficiencies in the underlying cash flow to service the monthly loan payments and meet operating expenses. At this time, management believes that the collateral and the allocated allowance for loan losses is adequate to cover these loans; however, should property values deteriorate, additional write-downs or additional provisions may be necessary.

44

Analysis of Allowance for Loan Losses

The allowance for loan losses was $36.1 million, or 2.68% of outstanding gross loans, as of September 30, 2022, as compared to $34.4 million, or 2.60% of outstanding gross loans, at December 31, 2021.  

Management maintains an allowance for loan losses to absorb estimated credit losses associated with the loan portfolio. The adequacy of the allowance is determined by management through ongoing quarterly loan quality assessments.

Management assesses the estimated credit losses inherent in the non-classified and classified portions of our loan portfolio by considering a number of factors or elements including:

 

•

Management’s evaluation of the collectability of the loan portfolio;

 

•

Historical loss experience in the loan portfolio;

 

•

Levels of and trends in delinquency, classified assets, non-performing and impaired loans;

 

•

Effects of changes in underwriting standards and other changes in lending policies, procedures and practices;

 

•

Experience, ability, and depth of lending management and other relevant staff;

 

•

Local, regional, and national trends and conditions, including industry-specific conditions;

 

•

The effect of changes in credit concentration; and

 

•

External factors such as competition, legal and regulatory conditions, as well as typhoons, pandemics such as COVID-19 and other natural disasters.

Management determines the allowance for the classified loan portfolio and for non-classified loans by applying a percentage loss estimate that is calculated based on the above noted factors and trends. Management normally writes down impaired loans after determining the loan collateral fair value versus the outstanding loan balance. Our analysis of the adequacy of the allowance incorporates the provisions made for our non-classified loans and classified loans.

While management believes it uses the best information available for calculating the allowance, the results of operation could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. The current qualitative and quantitative factors used to calculate the allowance are inherently subjective. The estimates and assumptions are subject to changes in economic prospects and regulatory guidelines, and other circumstances over which management has no control. The allowance may prove in the future to be insufficient to cover all of the losses the Bank may incur and it may be necessary to increase the allowance from time to time as a result of monitoring its adequacy.

45

The following table summarizes the changes in our allowance for loan losses:

 

 

 

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

 

 

Management evaluates all impaired loans not less frequently than quarterly in conjunction with our calculation and determination of the adequacy of the allowance for loan losses.

46

The Bank has one significant borrowing relationships 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 borrower’s bankruptcy plan was confirmed in October 2022. The Bank believes it has sufficient collateral coverage to protect its current exposure in these matters, however due to the complexities of the bankruptcy cases and uncertainties surrounding ongoing negotiations, the ultimate outcomes may result in losses.

 

Total Cash and Cash Equivalents

Total cash and cash equivalents were $265.0 million and $557.4 million at September 30, 2022 and December 31, 2021, respectively. The decrease is the result of the disbursement of various funds received from the CARES Act. This balance, which is comprised of cash and due from bank balances and interest-bearing deposits that we maintain at other financial institutions (including the Federal Reserve Bank of San Francisco, but excepting restricted cash), will vary depending on daily cash settlement activities, the amount of highly liquid assets needed based on known events such as the repayment of borrowings and scheduled withdrawals, and actual cash on hand in the Bank’s branches.  

The following table sets forth the composition of our cash and cash equivalent balances at September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

Variance

 

Cash and due from banks

 

$

38,850

 

 

$

36,660

 

 

$

2,190

 

Interest-bearing deposits with financial institutions

 

 

226,163

 

 

 

520,743

 

 

 

(294,580

)

Total cash and cash equivalents

 

$

265,013

 

 

$

557,403

 

 

$

(292,390

)

 

Investment Securities

The Bank manages its securities portfolio to provide a source of both liquidity and earnings. The Bank has an Asset/Liability Committee (“ALCO”) that develops and recommends current investment policies to the Board of Directors based on its operating needs and market circumstances. The Bank’s overall investment policy is formally reviewed and approved annually by the Board of Directors, and the Asset/Liability Committee is responsible for monitoring and reporting compliance with the investment policy. Investment portfolio reports are provided to the Board of Directors on a monthly basis.

47

At September 30, 2022, the carrying value of the investment securities portfolio (excluding ASC Trust LLC stock and Federal Home Loan Bank stock) totaled $816.8 million, which represents a $5.2 million increase from the portfolio balance of $811.7 million at December 31, 2021. The table below sets forth the amortized cost and fair value of our investment securities portfolio, with gross unrealized gains and losses, at September 30, 2022 and December 31, 2021:

 

 

 

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 other public requirements.

48

The amortized cost and fair value of investment securities by contractual maturity at September 30, 2022 and December 31, 2021, follows:

 

 

 

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

 

 

49

 

Temporarily Impaired Securities

The following table shows the gross unrealized losses and fair value of investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at 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 Company does not believe that any of the investment securities that were in an unrealized loss position as of September 30, 2022, which included a total of 238 securities, were other-than-temporarily impaired. Specifically, the 238 securities were comprised of 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).  

Total gross unrealized losses were primarily attributable to changes in interest rates relative to when the investment securities were purchased, and not due to changes in the credit quality of the investment securities. The Bank does not intend to sell the investment

50

securities that are in an unrealized loss position and it is not likely that, except as needed to fund our liquidity position, the Bank will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

Deposits

At September 30, 2022, total deposit liabilities decreased by $182.1 million from $2.53 billion at December 31, 2021. Non-interest bearing deposits decreased by $99.8 million, to $881.8 million at September 30, 2022, compared to $981.5 million at December 31, 2021, and interest bearing deposits decreased by $82.3 million, to $1.47 billion at September 30, 2022, from $1.55 billion at December 31, 2021. The 7.19% decrease in total deposits was primarily due to the disbursement of funds from various COVID-19 federal relief programs.

The following table sets forth the composition of our interest-bearing deposit portfolio with the balances and average interest rates at September 30, 2022 and December 31, 2021, respectively:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Balance

 

 

Average

rate

 

 

Balance

 

 

Average

rate

 

Interest-bearing checking accounts

 

$

363,956

 

 

 

0.01

%

 

$

401,753

 

 

 

0.03

%

Savings accounts

 

 

1,083,723

 

 

 

0.01

%

 

 

1,123,499

 

 

 

0.03

%

Certificates of deposit

 

 

21,716

 

 

 

0.05

%

 

 

26,442

 

 

 

0.12

%

Total interest-bearing deposits

 

$

1,469,395

 

 

 

0.01

%

 

$

1,551,694

 

 

 

0.03

%

 

As mentioned earlier, the Bank has expanded its operations and its branch network since it first opened in 1972, first in Guam, then in the other islands of our region and in San Francisco, California. As time has passed, the Bank has gathered market share in each of the islands. In recent years, in order to diversify its geographic market, the Bank has increased its focus on growth in the California region. The following table provides figures for deposits in the Bank’s administrative regions at September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Guam

 

$

1,334,036

 

 

$

1,386,314

 

Commonwealth of the Northern Mariana Islands

 

 

455,233

 

 

 

529,750

 

The Freely Associated States of Micronesia

 

 

500,357

 

 

 

557,444

 

California

 

 

61,523

 

 

 

59,723

 

Total

 

$

2,351,149

 

 

$

2,533,231

 

 

During the nine months ended September 30, 2022, the Bank’s deposits decreased by $182.1 million (7.19%) to $2.35 billion compared to December 31, 2021. During this period the decrease in our deposits were in our CNMI branches by $74.5 million, Guam branches by $52.3 million, and FAS branches by $57.1 million. These decreases were partially offset by increases in our California region of $1.8 million.

Borrowed Funds

The Bank has a variety of sources from which it may obtain secondary funding. These sources include, among others, the Federal Reserve Bank of San Francisco, the Federal Home Loan Bank of Des Moines, and credit lines established with our correspondent banks. Borrowings are obtained for a variety of reasons, which include, but are not limited to, funding loan growth, the purchase of investments in the absence of core deposits, and to provide additional liquidity to meet the demands of depositors.

On June 29, 2021, the Company issued $20.0 million of its 4.75% Fixed-to-Floating Rate Subordinated Notes, due July 1, 2031 (the “2031 Notes”). The 2031 Notes are intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. The 2031 Notes have a ten-year term and initially bear interest at a fixed annual rate of 4.75%. Beginning July 1, 2026, the interest rate will reset quarterly to the then-current three-month SOFR plus 413 basis points. 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 2031 Notes to acquire an additional 25% of the stock of ASC Trust LLC at the third and final closing pursuant to the 2016 Stock Purchase Agreement between the Company and David J. John. The Company intends to use the remainder of the proceeds from the 2031 Notes for general corporate purposes.  

On June 27, 2019, the Company issued $15.0 million of its 6.35% Fixed-to-Floating Rate Subordinated Notes, due June 30, 2029 (the “2029 Notes”). The 2029 Notes are intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. The 2029 Notes have a ten-year term and initially bear interest at a fixed annual rate of 6.35%. Beginning June 30, 2024, the interest rate will reset quarterly to the then-current three-month LIBOR plus 466 basis points. On July 1, 2019, with the approval of the Federal Reserve Bank of San Francisco, the Company used $4.1 million of the proceeds from the 2029 Notes to acquire an additional 20% of the stock of ASC Trust LLC at the second closing pursuant to the 2016 Stock Purchase Agreement between the Company and David J.

51

John. On July 5, 2019, $10.0 million of the balance of the proceeds from the 2029 Notes was also used to purchase ten (10) shares of Series B Common Stock from the Bank, with a par value of $1.0 million per share, to support the Bank’s strategic growth.

At September 30, 2022 and at December 31, 2021, the Company had no short-term borrowings.

Liquidity

We actively manage our liquidity to ensure that sufficient funds are available to meet our needs for cash, including cash needed to fund new loans and to accommodate deposit withdrawals and other transactions by our customers. We project future sources and uses of funds, and maintain additional liquid funds for unanticipated events. Our primary sources of cash include cash we have in deposits at other financial institutions, the repayment of loans, proceeds from the sale or maturity of investment securities, and increases in deposits. The primary uses of cash include funding new loans and making advances on existing lines of credit, purchasing investments, funding new residential mortgage loans, funding deposit withdrawals, and paying operating expenses. From time to time, we may maintain funds in overnight Federal Funds and other short-term investments to provide for short-term liquidity needs. We also have established, for contingency funding purposes, credit lines with the Federal Reserve Bank of San Francisco, the Federal Home Loan Bank-Seattle, and correspondent commercial banks in the U.S. We believe that our liquid assets, together with our available credit lines, will be sufficient to meet normal operating requirements for at least the next twelve months, including to enable us to meet any increase in withdrawals from depository accounts that might occur in the foreseeable future.

At September 30, 2022, our liquid assets, which include cash and due from banks, interest-earning deposits with financial institutions (excluding restricted cash), and investment securities available-for-sale totaled $764.4 million, down $292.3 million from $1.06 billion at December 31, 2021. This decrease is comprised of a $294.6 million decrease in interest bearing deposits in banks and a $131 thousand decrease in investment securities available-for-sale, partially offset by a $2.2 million increase in cash and due from banks.  

Management believes we have sufficient cash to meet the demands of the distribution of funds under the CARES Act. However, we will monitor our vault cash on a daily basis, and if the need arises, we will acquire additional cash by drawing down our deposits with other financial institutions, including the Federal Bank of San Francisco.    

Contractual Obligations

The Bank utilizes facilities, equipment and land under various operating leases with terms, including renewal options, ranging from 1 to 99 years.

The following table provides the maturities of lease liabilities at September 30, 2022:

 

 

 

Operating

Leases (a)

 

 

Total

 

2022

 

$

767

 

 

$

767

 

2023

 

 

2,893

 

 

 

2,893

 

2024

 

 

2,880

 

 

 

2,880

 

2025

 

 

2,824

 

 

 

2,824

 

2026

 

 

2,614

 

 

 

2,614

 

2027

 

 

2,282

 

 

 

2,282

 

After 2027

 

 

39,642

 

 

 

39,642

 

Total lease payments

 

 

53,902

 

 

 

53,902

 

Less: Interest (b)

 

 

25,065

 

 

 

25,065

 

Present value of lease liabilities (c)

 

$

28,837

 

 

$

28,837

 

 

Note: For leases commencing prior to 2019, minimum lease payments exclude payments to landlords for real estate taxes and common area maintenance.

 

(a)

Operating lease payments include $18.9 million related to options to extend lease terms that are reasonably certain of being exercised.

 

(b)

Calculated using the incremental borrowing rate based on the lease term for each lease.

 

(c)

Includes the current portion of $1.9 million for operating leases.

 

The Bank leases certain facilities from two separate entities in which two of its directors have separate ownership interests. Lease payments made to these entities during the nine months ended September 30, 2022 and 2021, approximated $291 thousand and $302 thousand, respectively. During the three months ended September 30, 2022 and 2021, lease payments made to these entities approximated $129 thousand and $97 thousand, respectively

52

Additionally, the Bank leases office space to third parties, with original lease terms ranging from 1 to 3 years with option periods ranging up to 12 years. At September 30, 2022, minimum future rents to be received under non-cancelable operating sublease agreements were $11 thousand and $29 thousand for the periods ending December 31, 2022 and 2023, respectively.

A summary of rental activities for the three and nine months ended September 30, 2022, respectively, is as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Rent expense

 

$

1,053

 

 

$

1,016

 

 

$

3,086

 

 

$

3,056

 

Total rent expense

 

$

1,053

 

 

$

1,016

 

 

$

3,086

 

 

$

3,056

 

 

Off Balance Sheet Arrangements

The Bank is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in our condensed consolidated financial statements.

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

A summary of financial instruments with off-balance-sheet risk at 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 certain lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer.

Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party or the shipment of merchandise from a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Almost all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is effectively the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments.

The Bank considers its standby and commercial letters of credit to be guarantees. At September 30, 2022, the maximum undiscounted future payments that the Bank could be required to make was $52.3 million. Almost all of these arrangements mature within one year. The Bank generally has recourse to recover from the customer any amounts paid under these guarantees. Most of the guarantees are fully collateralized; however, several that are extended to the Bank’s most creditworthy customers are unsecured. The Bank has recorded $53 thousand in reserve liabilities associated with commitments to extend credit and letters of credit at September 30, 2022.

Mortgage loans serviced for others are not included in the accompanying condensed consolidated statements of financial condition. The unpaid principal balances of mortgage loans serviced for others were $172.3 million and $181.1 million at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022 and December 31, 2021, the Bank’s mortgage servicing rights each totaled $1.6 million, respectively.

Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the United States federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s condensed consolidated

53

financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet or exceed specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). As of 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 have been no conditions or events since the most recent FDIC notification that management believes have changed the Bank’s category.

 

The Company’s required and actual capital amounts and ratios as of September 30, 2022 and December 31, 2021, were as follows:

 

 

 

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

%

 

Since the formation of BankGuam Holding Company in 2011, our assets have grown by 132.48% ($1.46 billion), while our stockholders’ equity has increased by 44.75% ($39.7 million, including $90.7 million in retained earnings). The growth in equity has contributed to help keep the capital ratios to be well above the well capitalized standards.

 

The Bank received a large influx of deposits from the federal relief programs due to the COVID-19 pandemic, resulting in the growth of its balance sheet as compared to 2020. As of September 30, 2022, approximately $130.8 million in COVID related funds have yet to be disbursed. Although the Bank’s average assets decreased at September 30, 2022 to $2.56 billion from $2.91 billion in December 31, 2021, the growth resulting from the receipt of COVID funds has put pressure on its ratio of Tier 1 capital to average assets. Management believes that the Bank has the capacity to absorb the growth in total assets, and the tools needed to move deposits off its balance through its Trust services to continue to be above the well capitalized standards under the regulatory framework for prompt corrective action.

Reverse Stock Split

On October 31, 2022, the Company’s effected a 1-for-500 reverse stock split of the Company’s common stock. Shareholders of the Company who own fewer than 500 shares of the Company’s common stock will receive a cash payment in lieu of a fraction of a share, and will no longer be shareholders of the Company. Shareholders holding 500 or more shares of the Company’s common stock will remain shareholders after the reverse stock split, and will also be entitled to receive a cash payment in lieu of receiving a fraction of a share. The Board of Directors determined that $14.75 per share outstanding prior to the reverse stock split would be a fair price to pay for shares that will be canceled in lieu of issuing a fraction of a share in connection with the reverse stock split. The Company

54

estimates that the aggregate amount of cash payable to shareholders in lieu of fractional shares as a result of the reverse stock split is approximately $9.0 million, which is being paid by the Company out of cash on hand.

Stock Purchase Plan

The Company’s 2011 Employee Stock Purchase Plan (the “2011 Plan”) was adopted by the Company’s Board of Directors and approved by the Company’s Stockholders on May 2, 2011, to replace the Company’s 2001 Non-Statutory Stock Option Plan. This plan was subsequently adopted by the Company after the reorganization. The 2011 Plan is open to all employees of the Company and its subsidiaries who have met certain eligibility requirements.

Under the 2011 Plan, as amended and restated as of July 1, 2012, eligible employees can purchase, through payroll deductions, shares of common stock at a discount. The right to purchase stock is granted to eligible employees during a quarterly offer period that is established from time to time by the Board of Directors of the Company. Eligible employees cannot accrue the right to purchase more than $25 thousand worth of stock at the fair market value at the beginning of each offer period. Eligible employees also may not purchase more than one thousand five hundred (1,500) shares of stock in any one offer period. The shares are purchased at 85% of the fair market price of the stock on the enrollment date.

In April 2022, the Company suspended the Employee Stock Purchase Plan in connection with the Company’s plans to implement a 1-for-500 reverse stock split, which was effected on October 31, 2022.

Contingency Planning and Cybersecurity

The Bank has developed a comprehensive business continuity plan to manage disruptions that affect customers or internal processes, whether caused by man-made or natural events. In modern banking, technology has taken on an increasingly important role, and the Bank also has a technology recovery component incorporated into the business continuity plan that provides procedures for recovering from a technology failure. The technology recovery procedures are tested and implemented from time to time. The recovery time objectives for the Bank’s major technological processes range from eight hours to 80 hours, with the goal of enabling the Bank to maintain or resume operations with a minimum impact on its customers. As the results of testing are analyzed and as technology continues to advance, improvements are made in the Bank’s processes and procedures as the plan evolves, although there can be no assurance that business disruption or operational losses will not occur.

The rapid advances in computing and telecommunications technology over the past several decades have brought with them increasingly sophisticated methods of delivering financial services through electronic channels. Along with these advances, though, have come risks regarding the integrity and privacy of data, and these risks apply to banking, falling into the general classification of cybersecurity. The Bank has made substantial investments in multiple systems to ensure both the integrity of its data and the protection of the privacy of its customers’ personal financial and identity information. While it is not possible for anyone to give an absolute guarantee that data will not be compromised, the Bank strives to provide a reasonable assurance that the financial and personal data that it holds are secure.

 

 

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2022, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s Rules and forms and is accumulated and communicated to management, including our Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2022, that have  materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

55

PART II. OTHER INFORMATION

 

Item 1A. Risk Factors

The following description of risk factors includes material changes to, and supersedes the description of, risk factors associated with our business, financial condition and results of operations previously disclosed in “Item 1A. Risk Factors” of our Annual Report for the year ended December 31, 2021 on Form 10-K, as filed with the SEC on March 28, 2022. Our business, financial condition and results of operations are subject to various risks, including those discussed below, in our Annual Report on Form 10-K, and in other documents that we file with the SEC from time to time. The risks discussed are those that we believe are the most significant risks, although additional risks not presently known to us or that we currently deem less significant may also adversely affect our business, financial condition and results of operations, perhaps materially.

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-Q. The following information should be read in conjunction with the condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

The reverse stock split may decrease the liquidity of the shares of our common stock and have other impacts on our common stock, our business and our prospects.

On October 31, 2022, we effected a 1-for-500 reverse stock split of our common stock. The liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that are outstanding following the reverse stock split. In addition, the reverse stock split likely increased the number of stockholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.

If we terminate our SEC reporting obligations, there will be less information regarding the Company and its financial results available, and we will no longer be subject to certain obligations applicable to SEC registrants, which could impact an investment in our common stock.

After completion of the reverse stock split, we intend to terminate our SEC reporting obligations and cease to file annual, quarterly, current, and other reports and documents with the SEC. While we intend to continue to prepare audited annual financial statements which will be made available to shareholders through our website, we will not be providing periodic reports in the format currently required of us under the provisions of the Exchange Act and, as a result, continuing shareholders will have access to less information about us and our business, operations, and financial performance, which could result in a significant decrease in the value of our common stock. We would also no longer be subject to the provisions of the Sarbanes-Oxley Act (although the Board of Directors may decide, in its sole discretion, to continue to maintain compliance with some or all of the provisions of the Sarbanes-Oxley Act) and certain of the liability provisions of the Exchange Act. Our executive officers, directors and 10% shareholders will no longer be required to file reports relating to their transactions in our common stock with the SEC. In addition, our executive officers, directors and 10% shareholders will no longer be subject to the short-swing profits recovery provisions of the Exchange Act, and persons acquiring more than 5% of our common stock will no longer be required to report their beneficial ownership under the Exchange Act.

 

56

 

Item 6. Exhibits

 

Exhibit No.

 

Exhibit

 

 

 

 

 

 

31.01

 

Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.02

 

Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.01

 

Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

*  Management contract or compensatory plan or arrangement.

 

57

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, BankGuam Holding Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

BANKGUAM HOLDING COMPANY

 

 

 

Date: November 10, 2022

By:

/s/ JOAQUIN P.L.G. COOK 

 

 

Joaquin P.L.G. Cook,

President and Chief Executive Officer

 

 

 

Date: November 10, 2022

By:

/s/ SYMON A. MADRAZO

 

 

Symon A. Madrazo,

Senior Vice President and Chief Financial Officer

 

58