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 Guamcorporation 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 InvestmentServices ("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 Guamtrust company. In July 2016, subsequent to the approval of the Federal Reserve Bank of San Franciscoin June 2016, the first purchase of 25% of ASC Trust LLCwas 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 LLCwas purchased by the Company in July 2021. This transaction brought the Company's ownership of ASC Trust LLCto 70%, and completes the transactions contemplated by the Agreement. The Company evaluated its ownership in ASC Trust LLCafter the last transaction in accordance to ASC 810 - Consolidation, and determined that the Company has control over ASC Trust LLCrequiring consolidation. ASC Trust LLCis 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 Governorsof 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 Piaobranches. 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 government responses have impacted our operations in 2021 and 2022. See “Note 2 – Summary of significant accounting policies – COVID-19” for further details.
Summary of operating results
The following table provides unaudited comparative information with respect to our results of operations for the three months ended
March 31, 2022and 2021, respectively: Three Months Ended March 31, 2022 2021 % Amount Amount Change Interest income $ 20,989 $ 20,5132.3 % Interest expense 508 353 43.9 % Net interest income, before provision for loan losses 20,481 20,160 1.6 % Provision for loan losses 1,425 2,475 -42.4 % Net interest income, after provision for loan losses 19,056 17,685 7.8 % Non-interest income 7,393 4,209 75.6 % Non-interest expense 22,120 17,870 23.8 % Income before income taxes 4,329 4,024 7.6 % Income tax expense 815 729 11.8 % Net income $ 3,514 $ 3,2956.6 % Earnings per common share (EPS): Basic and diluted EPS $ 0.32 $ 0.33As the above table indicates, our net income increased in the three months ended March 31, 2022, as compared to the corresponding periods in 2021. In the three months ended March 31, 2022, we recorded net income after taxes of $3.5 million, an increase of $219 thousand(or 6.7%) as compared to the same period in 2021. The primary reasons for the increase were the $3.2 millionincrease in non-interest income, a $1.1 milliondecrease in provision for loan losses, and a $321 thousandincrease in net interest income, partially offset by the $4.3 millionincrease in non-interest expense, and an $86 thousandincrease in income tax expense. The increase in non-interest income is largely due the $3.8 millionincrease in service charges and fees, primarily due to the fee income from ASC Trust LLC, and the $303 thousandincrease in merchant and cardholder net income, partially offset by the $564 thousanddecrease in other income and $262 thousanddecrease in gain on sale of investment securities. The increase in non-interest expense is due to the increase of $2.4 millionin equipment and depreciation and the $1.8 millionadditional expenses related to ASC Trust LLC. The following table shows the decrease in our net interest margin in the three months ended March 31, 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. Our return on average equity decreased by 6.08% during the three months ended March 31, 2022, as compared to the corresponding period in 2021, and our return on average assets decreased by 3 basis points during the same comparative period, primarily due to the increase in average assets: Three Months Ended March 31, 2022 2021 Net interest margin 3.11 % 3.48 % Return on average assets 0.51 % 0.54 % Return on average equity 7.91 % 7.68 % 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 SECon 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. 33
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'sOpen 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 months ended March 31, 2022and 2021, respectively: Three Months Ended March 31, % 2022 2021 Change Interest income 20,989 $ 20,5132.32 % Interest expense 508 353 43.91 % Net interest income 20,481 $ 20,1601.59 % Net interest margin 3.11 % 3.48 % -0.37 %
Net interest income increased by 1.59% for the quarter ended
For the three months ended
March 31, 2022, net interest income increased by $321 thousandas compared to the same period in 2021. Total interest income increased by $476 thousanddue to increases of $976 thousandin earnings on investment securities and $112 thousandfrom short term investments, partially offset by $612 thousandin interest income from loans during the three months ended March 31, 2022, compared to the previous year. The decrease in interest income from loans is largely due to the 150 basis points (1.50%) cut in the federal funds rate in March 2020. The reduction in our net interest margin was the result of a decrease of 0.35% in the yield on our average earning assets in the three months ended March 31, 2022, as compared to the corresponding period of 2021, the effect of which was partially offset by an increase in our average earning assets of 13.6% compared to the same comparative period. 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. The economy has since improved, and the FOMCincreased the target range by 25bps to 0.25% - 0.50% on March 16, 2022, and 50bps to 0.75% - 1.00% on May 4, 2022. The increase in interest rates will have a positive impact to the Company's net interest income as loans and securities reprice. 34
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 months ended
March 31, 2022and 2021: Three Months Ended March 31, 2022 2021 Average Interest Average Average Interest Average Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
Interest earning assets: Short term investments1
$ 461,217$ 179 0.16 % $ 333,876$ 67 0.08 % Investment Securities² 850,497 3,175 1.49 % 557,885 2,199 1.58 % Loans³ 1,319,790 17,635 5.34 % 1,424,496 18,247 5.12 % Total earning assets 2,631,504 20,989 3.19 % 2,316,257 20,513 3.54 % Noninterest earning assets 149,540 133,015 Total assets $ 2,781,044 $ 2,449,272Interest-bearing liabilities: Interest-bearing checking accounts $ 401,473$ 10 0.01 % $ 320,382$ 24 0.03 % Savings accounts 1,192,714 29 0.01 % 1,080,395 79 0.03 % Certificates of deposit 28,991 4 0.06 % 28,861 12 0.17 % Subordinated debt 34,411 465 5.41 % 14,781 238 6.44 % Total interest-bearing liabilities 1,657,589 508 0.12 % 1,444,419 353 0.10 % Non-interest bearing liabilities 945,715 833,203 Total liabilities 2,603,304 2,277,622 Stockholders' equity 177,740 171,650 Total liabilities and stockholders' equity $ 2,781,044 $ 2,449,272Net interest income $ 20,481 $ 20,160Interest rate spread 3.07 % 3.44 % Net interest margin 3.11 % 3.48 %
1 Short-term investments consist of interest-bearing deposits that we maintain
with other financial institutions. 2 Includes all investment securities in the Available-for-Sale and the Held-to-Maturity classifications. The Bank did not own any tax exempt securities during 2022 and 2021.
3 Loans include the average outstanding loan balance. Interest income on loans
includes loan fees
For the three months ended
March 31, 2022, our total average earning assets increased by $315.2 million, as compared to the same period in 2021. The increase during the three months ended March 31, 2022, compared to the same period in 2021, is attributed to the $127.3 millionincrease in our average short term investments and a $292.6 millionincrease in our average investment securities, partially offset by a $104.7 milliondecrease in our average loan portfolio. Average noninterest earning assets increased by $16.5 million. In the three months ended March 31, 2022, average total interest-bearing liabilities increased by $213.2 millionin comparison to the same period in 2021. In the three months ended March 31, 2022, the increase was comprised of the $112.3 millionincrease in average savings accounts, an $81.1 millionincrease in average interest-bearing checking accounts, a $19.6 millionincrease in subordinated debt, and a $130 thousandincrease in average certificate of deposit accounts. The overall increase in average interest-bearing liabilities resulted from an increase in our deposit base, primarily in consumer savings, and government checking and savings accounts as result of the funds received by depositors from the CARES Act. This was supplemented by an increase of $112.5 millionin average non-interest bearing liabilities during the three months ended March 31, 2022, compared to the same period in 2021, primarily in traditional checking accounts, moderated an overall increase of $325.7 millionin average total liabilities. During the three months ended March 31, 2022, average stockholders' equity increased by $6.1 million(3.6%) in comparison to the year-earlier period. Our interest rate spread decreased by 37 basis points (10.94%), and our net interest margin also decreased by 37 basis points (10.58%) in the three months ended March 31, 2022, as compared to the same period in 2021. During the three months ended March 31, 2022, the decrease in our interest rate spread is attributed to the 35 basis points (9.9%) decrease in the average yield on our interest earning assets, from 3.54% to 3.19%, and the increase in the average rate on our interest-bearing liabilities by 2 basis points from 0.10% to 0.12%. The decrease in our interest income is primarily due to the 150 basis point (1.50%) rate cut in March 2020by 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. 35 -------------------------------------------------------------------------------- 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 months ended March 31, 2022, in comparison to the three months ended March 31, 2021: Three Months Ended March 31, 2022 vs. 2021 (In thousands) Net Change in Attributable to: Interest Change in Change in Income/Expense Rate Volume Interest income: Short term investments $ 112 $ 250 $ (138 ) Investment securities 976 (465 ) 1,441 Loans (612 ) 3,148 (3,760 ) Total interest income 476 2,933 (2,457 ) Interest expense: Interest-bearing checking accounts (14 ) (64 ) 50 Savings accounts (50 ) (211 ) 161 Certificates of deposit (8 ) (32 ) 24 Other borrowings 227 (153 ) 380 Total interest expense 155 (460 ) 615 Net interest income $ 321 $ 3,393 $ (3,072 )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. 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 March 31, 2022, the Bank's provision for loan losses was $1.4 million, which was $1.1 millionlower than the corresponding period of 2021. The decrease is primarily due to the reduction in the monthly provision for loan losses from $875 thousandto $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. In the three months ended March 31, 2022, management adjusted the economic risk factors to incorporate the current economic conditions, which includes fluctuations in tourism and unemployment due to the COVID-19 pandemic. Management believes that the provision recorded was sufficient to offset the incremental risk of loss inherent in the gross loan portfolio of $1.33 billionat March 31, 2022, an increase of $3.9 millionfrom December 31, 2021. The allowance for loan losses at March 31, 2022, was at $35.1 millionor 2.65% of total gross loans outstanding as of the balance sheet date, an increase of $677 thousandfrom December 31, 2021. We recorded net loan charge-offs of $748 thousandfor the three months ended March 31, 2022. 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. 36
The table below represents the main components of non-interest income and their variations for the three months ended
Three Months Ended March 31, 2022 2021 Amount Percent Amount Amount Change Change Non-interest income Service charges and fees
$ 5,443 $ 1,670 $ 3,773225.9 % Gain on sale of investment securities 10 272 (262 ) -96.3 % Income from merchant services, net 651 648 3 0.5 % Income from cardholders, net 553 253 300 118.6 % Trustee fees 86 152 (66 ) -43.4 % Other income 650 1,214 (564 ) -46.5 % Total non-interest income $ 7,393 $ 4,209 $ 3,18475.6 % For the three months ended March 31, 2022, non-interest income totaled $7.4 million, which represented an increase of $3.2 million(75.6%) as compared to the three months ended March 31, 2021. The increase during the three months ended March 31, 2022, is primarily attributed to the increases in income of $3.8 millionfrom service charges and fees, and $300 thousandin net income from cardholders, partially offset by a $564 thousanddecrease in other income, a $262 thousanddecrease in gain on sale of investment securities, and a $66 thousandreduction from trustee fees. The increase in service charges and fees is primarily due to the $2.7 millionin fees generated by ASC Trustactivities and an increase in the Bank's service charges and fee income of $987 thousand. Non-interest Expense
The table below represents the main components of non-interest expenses and the variations for the three months ended
Three Months Ended March 31, 2022 2021 Amount Percent Amount Amount Change Change Non-interest expense: Salaries and employee benefits
$ 9,225 $ 8,696 $ 5296.1 % Occupancy 2,221 2,129 92 4.3 % Equipment and depreciation 5,321 2,941 2,380 80.9 % Insurance 457 489 (32 ) -6.5 % Telecommunications 450 366 84 23.0 % FDIC insurance assessment 322 344 (22 ) -6.4 % Professional services 803 565 238 42.1 % Contract services 448 621 (173 ) -27.9 % Other real estate owned 13 14 (1 ) -7.1 % Stationery and supplies 169 121 48 39.7 % Training and education 260 44 216 490.9 % General, administrative and other 2,431 1,540 891 57.9 % Total non-interest expense $ 22,120 $ 17,870 $ 4,25023.8 % For the three months ended March 31, 2022, non-interest expense totaled $22.1 million, which was an increase of $4.3 million(23.8%) as compared to the same period in 2021. The increase is attributed to the increases of $2.4 millionin equipment and depreciation, $529 thousandin salaries and employee benefits, $238 thousandin professional services, $216 thousandin training and education, and $891 thousandin general, administrative and other, partially offset by a decrease of $173 thousandin contract services.
income tax expense
For the three months ended
March 31, 2022, the Bank recorded income tax expenses of $815 thousand, which was $86 thousandhigher than the income tax expense recorded for the corresponding period in 2021. 37
March 31, 2022, total assets were $2.73 billion, a decrease of 2.32% from the $2.79 billionat December 31, 2021. This $64.7 milliondecrease was comprised largely of the $115.4 milliondecrease in interest bearing deposits in banks, partially offset by the $36.9 millionincrease in our net investment securities portfolio, a $6.4 millionincrease in cash and due from banks, a $4.0 millionincrease in other assets, and a rise of $3.5 millionin net loans. The decrease in net loans and the increase in total assets resulted in the proportion of net loans to total assets decreasing from 46.0% at December 31, 2021, to 47.2% at March 31, 2022. The reduction in assets was associated with the $38.6 millionincrease in total deposits, a $3.1 milliondecrease in other liabilities, a $25.3 milliondecrease in accumulated other comprehensive loss, due to the increase in market rates, partially offset by a $2.2 millionincrease in retained earnings. Interest-Earning Assets
The following table shows the composition of our interest-earning assets as of
March 31, 2022 December 31, 2021 Variance Interest-earning deposits with financial institutions (including restricted cash)
$ 405,487$ 520,893 $ (115,406 )Federal Home Loan Bank stock, at cost 3,318 2,814 504 Investment securities available-for-sale 528,055 499,366 28,689 Investment securities held-to-maturity 320,481 312,294 8,187 Loans, gross 1,325,223 1,321,321 3,902 Total interest-earning assets $ 2,582,564$ 2,656,688 $ (74,124 )Loans Commercial & industrial loans are loans to businesses to finance capital purchases and improvements, or to provide cash flow for operations. Commercial mortgage loans include loans secured by real property for purposes such as the purchase or improvement of that property, wherein repayment is derived from the income generated by the real property or from business operations. Residential mortgage loans are loans to consumers to finance the purchase, improvement, or refinance of real property secured by 1-4 family housing units. Consumer loans include loans to individuals to finance personal needs and are either closed- or open-ended loans. Automobile loans fall under the consumer loan category, but the bulk of consumer loans is typically unsecured extensions of credit such as credit card debt and personal signature loans. A summary of the balances of loans at March 31, 2022and December 31, 2021, follows: March 31, 2022 December 31, 2021 Amount Percent Amount Percent Commercial Commercial & industrial $ 299,43122.6 % $ 295,83522.4 % Commercial mortgage 693,172 52.3 % 699,269 52.9 % Commercial construction 23,546 1.8 % 23,588 1.8 % Commercial agriculture 581 0.0 % 592 0.0 % Total commercial 1,016,730 76.7 % 1,019,284 77.1 % Consumer Residential mortgage 139,139 10.5 % 135,377 10.2 % Home equity 2,211 0.2 % 2,232 0.2 % Automobile 17,523 1.3 % 18,220 1.4 % Other consumer loans1 149,620 11.3 % 146,208 11.1 % Total consumer 308,493 23.3 % 302,037 22.9 % Gross loans 1,325,223 100.0 % 1,321,321 100.0 % Deferred loan (fees) costs, net (2,968 ) (3,223 ) Allowance for loan losses (35,085 ) (34,408 ) Loans, net $ 1,287,170 $ 1,283,6901 Comprised of other revolving credit, installment loans, and overdrafts. 38 -------------------------------------------------------------------------------- At March 31, 2022, total gross loans increased by $3.9 million, to $1.325 billion, from $1.321 billionat December 31, 2021. The increase in loans was attributed to a $6.5 millionincrease in consumer loans to $308.5 millionat March 31, 2022, from $302.0 millionat December 31, 2021. The underlying increase was primarily due to the increases of $3.8 millionin residential mortgage loans, and $3.4 millionin other consumer loans, partially offset by the decrease of $697 thousandin automobile. The increase in consumer loans was partially offset by the $2.6 milliondecrease in commercial loans to $1.017 billionat March 31, 2022, from $1.019 billionat December 31, 2021. The underlying decrease was primarily due to the decrease of $6.1 millionin commercial mortgage loans, partially offset by a $3.6 millionincrease in commercial & industrial loans. In recognition of the potential difficulties that may be faced by our commercial, real estate and consumer customers due to the COVID-19 pandemic, the Bank initiated a temporary program in March 2020under which affected commercial and consumer customers that may have their loan payments deferred or otherwise adjusted for a period of up to 90 days. This temporary program ended on June 30, 2020. The Bank continues to process commercial and consumer deferral requests on a case-by-case basis. With the passage of the Paycheck Protection Program, administered by the Small Business Administration, the Bank actively participated in assisting its customers with applications for resources through the program. PPP loans have either a two-year or five-year term and earn interest at 1%. The Bank believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. In 2020 and 2021, the Bank approved and funded over $93.4 millionand $56.6 millionin PPP loans, respectively. At March 31, 2022, the outstanding principal balance of PPP loans was at $17.6 million. As of May 5, 2021, a total of $141.3 millionin PPP loans have been forgiven, of which $133.6 millionwere forgiven in 2021 and $7.7 millionin 2020. 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.
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 Franciscoarea 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 March 31, 2022and December 31, 2021: March 31, 2022 December 31, 2021 Guam $ 689,717$ 684,435 Commonwealth of the Northern Mariana Islands 135,228
The Freely Associated States of Micronesia * 91,071 89,523 California 409,207 412,198 Total
$ 1,325,223$ 1,321,321
* The Freely Associated States (FAS) are made up of the Federated States of
As the table indicates, the Bank's total gross loans increased by 0.3% during the three months ended
March 31, 2022. By way of comparison, loans in Guamincreased by $5.3 million, or 0.8%, during the three months ended March 31, 2022. Loans in the Commonwealth of the Northern Mariana Islandsincreased by $63 thousandor 0.1%, and the Freely Associated States of Micronesiaincreased by $1.5 million, or 1.7%, during the same period. In the Californiaregion loans decreased by $3.0 million, or 0.7%, during the three months ended March 31, 2022.
In the current lending and interest rate environment, and in order to maintain sufficient liquidity in the ordinary course of business, and to account for disbursement of the funds received from the CARES Act, the Bank held
$405.3 millionin unrestricted interest-earning deposits with financial institutions at March 31, 2022, a decrease of $115.4 million, or 22.2%, from the $520.7 millionin 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 Bankat the end of the reporting period. From December 31, 2021, to March 31, 2022, the Bank's combined investment portfolio increased by $37.0 million, or 4.6%, from $811.7 millionto $848.7 million. The growth in the investment portfolio was comprised of a $28.9 millionincrease in available-for-sale securities, which increased by 5.8%, from $499.4 millionto $528.2 million, and an $8.2 millionincrease in our holdings of held-to-maturity securities, which increased by 2.6%, from $312.3 millionto $320.5 million. Management believes that the Bank maintains an adequate level of liquidity. 39
Non-performing loans and other non-performing 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 on our non-performing assets as well as restructured loans at
March 31, 2022 December 31, 2021 Non-accrual loans: Commercial & industrial $ 7,312 $ 7,610 Commercial mortgage 6,548 8,148 Residential mortgage 1,537 1,660 Other consumer 1 120 152 Total non-accrual loans 15,517 17,570 Loans past due 90 days and still accruing: Commercial & industrial 125 106 Commercial mortgage 764 - Residential mortgage 12 77 Automobile 88 41 Other consumer1 1,078 866 Total loans past due 90 days and still accruing 2,067 1,090 Total nonperforming loans 17,584 18,660 Restructured loans: Accruing loans $ 32,500 $ 32,595 Non-accruing loans (included in nonaccrual loans above) 4,778 6,083 Total restructured loans $ 37,278 $ 38,678 1 Comprised of other revolving credit, installment loans, and overdrafts. The above table indicates that nonperforming loans decreased by
$1.1 millionduring the three months ended March 31, 2022, which resulted from the decrease in total non-accrual loans by $2.1 million, from $17.6 millionto $15.5 million. The decrease in total non-accrual loans were due to the decreases of $1.6 millionin commercial mortgage, $298 thousandin commercial & industrial loans, and $123 thousandin residential mortgage loans. These decreases were partially offset by the $977 thousandincrease in total loans past due 90 days and still accruing from $1.1 millionto $2.1 million. The increases were $764 thousandin commercial mortgage loans, $212 thousandin other consumer loans, $47 thousandin automobile, and $19 thousandin commercial & industrial loans, partially offset by the decrease of $65 thousandin residential loans. At March 31, 2022, the Bank's largest nonperforming loans are five commercial mortgage loans totaling $6.1 millionfrom five relationships of $3.22 million, $939 thousand, $795 thousand, $642 thousandand $467 thousand, respectively, and one commercial & industrial loan relationship totaling $6.9 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. 40
Loan Loss Allowance Analysis
The provision for loan losses has been
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 and trends of delinquencies, classified assets, non-performing and
• Effects of changes in underwriting standards and other changes in lending
policies, procedures and practices;
• Experience, capacity and depth of loan and other management
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. 41
The following table summarizes the changes in our allowance for loan losses: Residential Commercial Mortgages Consumer Total (Dollars in thousands) Three Months Ended
March 31, 2022Allowance for loan losses: Balance at beginning of period $ 22,860 $ 2,304 $ 9,244 $ 34,408Charge-offs (190 ) - (1,159 ) (1,349 ) Recoveries 102 1 498 601 Provision 310 164 951 1,425 Balance at end of period $ 23,082 $ 2,469 $ 9,534 $ 35,085Allowance balance at end of period related to: Loans individually evaluated for impairment $ 3,508$ 39 $ 1,136 $ 4,683Loans collectively evaluated for impairment 19,574 2,430 8,398 30,402 Ending balance $ 23,082 $ 2,469 $ 9,534 $ 35,085Loan balances at end of period: Loans individually evaluated for impairment $ 10,973 $ 38,287 $ 1,350 $ 50,610Loans collectively evaluated for impairment 1,005,757 103,063 165,793 1,274,613 Ending balance $ 1,016,730 $ 141,350 $ 167,143 $ 1,325,223Three Months Ended March 31, 2021Allowance for loan losses: Balance at beginning of period $ 21,213 $ 1,990 $ 11,602 $ 34,805Charge-offs (77 ) (4 ) (1,514 ) (1,595 ) Recoveries 124 - 474 598 Provision 1,259 210 1,006 2,475 Ending balance $ 22,519 $ 2,196 $ 11,568 $ 36,283Allowance balance at end of period related to: Loans individually evaluated for impairment $ 3,502$ 1 $ 1,578 $ 5,081Loans collectively evaluated for impairment 19,017 2,195 9,990 31,202 Ending balance $ 22,519 $ 2,196 $ 11,568 $ 36,283Loan balances at end of period: Loans individually evaluated for impairment $ 60,538 $ 2,349 $ 1,716 $ 64,603Loans collectively evaluated for impairment 1,053,915 127,159 182,930 1,364,004 Ending balance $ 1,114,453 $ 129,508 $ 184,646 $ 1,428,607Year Ended December 31, 2021Allowance for loan losses: Balance at beginning of year $ 21,213 $ 1,990 $ 11,602 $ 34,805Charge-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 $ 34,408Allowance balance at end of year related to: Loans individually evaluated for impairment $ 3,510$ 50 $ 941 $ 4,501Loans collectively evaluated for impairment 19,350 2,254 8,303 29,907 Ending balance $ 22,860 $ 2,304 $ 9,244 $ 34,408Loan balances at end of year: Loans individually evaluated for impairment $ 48,459 $ 2,265 $ 1,059 $ 51,783Loans 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 assesses all impaired loans at least quarterly in conjunction with our calculation and determination of the adequacy of the loan loss allowance.
42 -------------------------------------------------------------------------------- The Bank has two significant borrowing relationships in bankruptcy totaling
$10.1 millionat March 31, 2022. The Bank has calculated a specific reserve within the allowance for one of the borrowing relationships in bankruptcy in the amount of $3.5 million. In March 2022, a court ruling increased the availability of assets for one of the borrowing relationships in bankruptcy to satisfy its outstanding liabilities. The Bank believes it has sufficient collateral coverage to protect its current exposure in these matters, however due to the complexities of the bankruptcy cases and uncertainties surrounding ongoing negotiations, the ultimate outcomes may result in losses.
Total cash and cash equivalents
Total cash and cash equivalents were
$448.4 millionand $557.4 millionat March 31, 2022and 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 shows the composition of our cash and cash equivalents balances as at
March 31, 2022 December 31, 2021 Variance Cash and due from banks $ 43,100 $ 36,660
$ 6,440Interest-bearing deposits with financial institutions 405,337 520,743 (115,406 ) Total cash and cash equivalents $ 448,437$ 557,403 $ (108,966 ) Investment SecuritiesThe 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. 43 -------------------------------------------------------------------------------- At March 31, 2022, the carrying value of the investment securities portfolio (excluding ASC Trust LLCstock and Federal Home Loan Bankstock) totaled $848.5 million, which represents a $36.8 millionincrease from the portfolio balance of $811.7 millionat 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 March 31, 2022and December 31, 2021: March 31, 2022 Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value Securities Available-for-Sale U.S.government agency and government sponsored
corporate debt securities (GSE)
12 (260 ) 28,818
U.S.government agency or GSE residential mortgage-backed securities 423,117 - (27,155 ) 395,962 Total $ 567,152$ 12 $ (39,109 ) $ 528,055Securities Held-to-Maturity U.S.government agency and government sponsored
corporate debt securities (GSE)
6 (64 ) 2,328
U.S.government agency or GSE residential mortgage-backed securities 41,627 35 (2,545 ) 39,117 Total $ 320,481$ 41 $ (33,293 ) $ 287,229December 31, 2021 Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value Securities Available-for-Sale U.S.government agency and government sponsored
corporate debt securities (GSE)
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 ) $ 499,366Securities Held-to-Maturity U.S.government agency and government sponsored
corporate debt securities (GSE)
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 ) $ 310,372At March 31, 2022and December 31, 2021, investment securities with a carrying value of $682.9 millionand $558.8 million, respectively, were pledged to secure various government deposits and other public requirements. 44
The amortized cost and fair value of investment securities by contractual maturity at
March 31, 2022 Available-for-Sale Held-to-Maturity Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value Due within one year
$ 26$ 26 $ - $ - Due after one but within five years 6,954 6,916 1,709 1,691 Due after five but within ten years 158,847 146,421 61,833 56,368 Due after ten years 401,325 374,692 256,939 229,170 Total $ 567,152 $ 528,055 $ 320,481 $ 287,229December 31, 2021 Available-for-Sale Held-to-Maturity Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value Due within one year $ 105 $ 105$ - $ - Due after one but within five years 8,331 8,377 1,228 1,246 Due after five but within ten years 151,682 148,389 62,925 62,257 Due after ten years 345,376 342,495 248,141 246,869 Total $ 505,494 $ 499,366 $ 312,294 $ 310,37245
The following table presents the gross unrealized losses and the fair value of investments with unrealized losses that are not considered to be permanently impaired, grouped by investment category and the length of time that the individual securities have been in a continuous position of unrealized loss. carried out at
March 31, 2022 Less Than Twelve Months More Than Twelve Months Total Unrealized Estimated Unrealized Estimated Unrealized Estimated Losses Fair Value Losses Fair Value Losses Fair Value Securities Available for Sale
U.S.government agency and government sponsored enterprise
(GSE) debt securities – $ – $
(170 ) 15,443 (90 ) 10,055 (260 ) 25,498
U.S.government agency or GSE
mortgage-backed securities (26,475 ) 389,126 (680 ) 6,836 (27,155 ) 395,962 Total
$ (26,645 ) $ 404,569$
Securities Held to Maturity US government agency and sponsored Agencies (GSE) debt securities
$ (15,566 ) $ 106,613$
(52 ) 1,303 (12 ) 106 (64 ) 1,409
U.S.government agency or GSE
mortgage-backed securities (2,514 ) 28,677 (31 ) 281 (2,545 ) 28,958 Total
$ (18,132 ) $ 136,593 $ (15,161 ) $ 139,558 $ (33,293 ) $ 276,151December 31, 2021 Less Than Twelve Months More Than Twelve Months Total Unrealized Estimated
Not realized Estimated Not realized Estimated
Losses Fair Value Losses Fair Value Losses Fair Value Securities Available for Sale
U.S.government agency and government sponsored enterprise
(GSE) debt securities
(71 ) 5,127 (176 ) 14,743 (247 ) 19,870
U.S.government agency or GSE
mortgage-backed securities (3,833 ) 290,573 - - (3,833 ) 290,573 Total
$ (6,728 ) $ 377,845$
Securities Held to Maturity
U.S.government agency and government sponsored enterprise
(GSE) debt securities
(37 ) 1,507 (8 ) 403 (45 ) 1,910
U.S.government agency or GSE
mortgage-backed securities (362 ) 28,498 (7 ) 529 (369 ) 29,027 Total
$ (1,794 ) $ 189,845 $ (241 ) $ 115,658 $ (2,035 ) $ 305,503The Company does not believe that any of the investment securities that were in an unrealized loss position as of March 31, 2022, which included a total of 221 securities, were other-than-temporarily impaired. Specifically, the 221 securities were comprised of 34 Small Business Administration Poolsecurities, 26 agency securities issued by Federal Home Loan Bank(FHLB), 33 mortgaged-backed securities and 19 agency securities issued by Federal Home Loan Mortgage Corporation (FHLMC), 71 mortgaged-backed securities and 1 agency security issued by Federal National Mortgage Association (FNMA), 19 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 46 -------------------------------------------------------------------------------- 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 March 31, 2022, total deposit liabilities decreased by $38.6 millionfrom $2.53 billionat December 31, 2021. Non-interest bearing deposits decreased by $99.2 million, to $882.3 millionat March 31, 2022, compared to $981.5 millionat December 31, 2021, and interest bearing deposits increased by $60.6 million, to $1.61 billionat March 31, 2022, from $1.55 billionat December 31, 2021. The 1.52% 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 March 31, 2022and December 31, 2021, respectively: March 31, 2022 December 31, 2021 Average Average Balance rate Balance rate Interest-bearing checking accounts $ 401,8350.01 % $ 401,7530.03 % Savings accounts 1,185,632 0.01 % 1,123,499 0.03 % Certificates of deposit 24,870 0.06 %
26,442 0.12% Total interest-bearing deposits
As mentioned earlier, the Bank has expanded its operations and its branch network since it first opened in 1972, first 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 Californiaregion. The following table provides figures for deposits in the Bank's administrative regions at March 31, 2022and December 31, 2021: March 31, 2022 December 31, 2021 Guam $ 1,417,580$
Commonwealth of the
Northern Mariana Islands475,630
The Freely Associated States of Micronesia 551,325 557,444 California 50,118 59,723 Total
$ 2,494,653$ 2,533,231 During the three months ended March 31, 2022, the Bank's deposits decreased by $38.6 million(1.5%) to $2.49 billioncompared to December 31, 2021. During this period the decrease in our deposits were in our CNMI branches by $54.1 million, Californiaregion by $9.6 million, and FAS branches by $6.1 million. These decreases were partially offset by the increase in our Guambranches by $31.3 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 millionof 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 millionof the proceeds from the 2031 Notes to acquire an additional 25% of the stock of ASC Trust LLCat 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 millionof 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 millionof the proceeds from the 2029 Notes to acquire an additional 20% of the stock of ASC Trust LLCat the second closing pursuant to the 2016 Stock Purchase Agreement between the Company and David J. John. On July 5, 2019, $10.0 millionof 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 millionper share, to support the Bank's strategic growth. 47
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 March 31, 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 $976.5 million, down $80.3 millionfrom $1.06 billionat December 31, 2021. This decrease is comprised of a $115.4 milliondecrease in interest bearing deposits in banks, partially offset by a $28.7 millionincrease in investment securities available-for-sale, and a $6.4 millionincrease 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.
The Bank uses 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
March 31, 2022: Operating Leases (a) Total 2022 $ 1,733 $ 1,7332023 2,022 2,022 2024 1,910 1,910 2025 1,778 1,778 2026 1,544 1,544 After 2026 33,218 33,218 Total lease payments 42,205 42,205 Less: Interest (b) 21,040 21,040
Present value of rental debts (c)
Note: For leases beginning before 2019, minimum lease payments exclude payments to landlords for property taxes and maintenance of common areas.
(a) Operating lease payments include
rental conditions which it is reasonably certain will be exercised.
(b) Calculated using incremental borrowing rate based on lease term for
each lease. (c) Includes the current portion of
$1.5 millionfor 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 three months ended March 31, 2022and 2021, approximated $65 thousandand $62 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 March 31, 2022, minimum future rents to be received under non-cancelable operating sublease agreements were $31 thousand, and $26 thousandfor the periods ending December 31, 2022, and 2023, respectively. 48
A summary of rental activity for the three months ended
Three Months Ended March 31, 2022 2021 Rent expense
$ 968$ 1,025 Total rent expense $ 968$ 1,025
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 the financial instruments presenting an off-balance sheet risk at
March 31, 2022 December 31, 2021 Commitments to extend credit
$ 165,064$ 162,569 Letters of credit: Standby letters of credit $ 48,890 $ 43,239 Commercial letters of credit 2,048 2,366 Total $ 50,938 $ 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 March 31, 2022, the maximum undiscounted future payments that the Bank could be required to make was $50.9 million. Almost all of these arrangements mature within one year. The Bank generally has recourse to recover from the customer any amounts paid under these guarantees. Most of the guarantees are fully collateralized; however, several that are extended to the Bank's most creditworthy customers are unsecured. The Bank has recorded $50 thousandin reserve liabilities associated with commitments to extend credit and letters of credit at March 31, 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 $177.4 millionand $181.1 millionat March 31, 2022and December 31, 2021, respectively. At March 31, 2022, and December 31, 2021, the Bank's mortgage servicing rights each totaled $1.6 million. Capital Resources The Company and the Bank are subject to various regulatory capital requirements administered by the United Statesfederal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's condensed consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet or exceed specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. 49 -------------------------------------------------------------------------------- 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 March 31, 2022and December 31, 2021, the Bank met all capital adequacy requirements to which it is subject. As of March 31, 2022, the Bank's capital ratios each exceeded the Federal Deposit Insurance Corporation'swell 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 FDICnotification that management believes have changed the Bank's category.
The required and actual capital amounts and ratios of the Company at
To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio At
March 31, 2022: Total capital (to Risk Weighted Assets) $ 225,23615.038 % $ 119,8198.000 % $ 149,77310.000 % Tier 1 capital (to Risk Weighted Assets) $ 171,36511.442 % $ 89,8646.000 % $ 119,8198.000 % Tier 1 capital (to Average Assets) $ 171,3656.165 % $ 111,1844.000 % $ 138,9805.000 % Common Equity Tier 1 Capital (to Risk Weighted Assets) $ 161,58210.788 % $ 67,3984.500 % $ 97,3536.500 % At December 31, 2021: Total capital (to Risk Weighted Assets) $ 222,49315.161 % $ 117,4038.000 % $ 146,75310.000 % Tier 1 capital (to Risk Weighted Assets) $ 168,62311.490 % $ 88,0526.000 % $ 117,4038.000 % Tier 1 capital (to Average Assets) $ 168,6235.792 % $ 116,4614.000 % $ 145,5775.000 % Common Equity Tier 1 Capital (to Risk Weighted Assets) $ 158,84010.824 % $ 66,0394.500 % $ 95,3906.500 % Since the formation of BankGuam Holding Companyin 2011, our assets have grown by 147.2% ( $1.6 billion), while our stockholders' equity has increased by 77.7 % ( $69.0 million, including $83.9 millionin 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 March 31, 2022, approximately $164.1 millionin COVID related funds have yet to be disbursed. Although the Bank's average assets decreased at March 31, 2022to $2.78 billionfrom $2.91 billionin 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
April 12, 2022, the Company's Board of Directors approved a 1-for-500 reverse stock split of the Company's common stock, which remains subject to shareholder approval and the receipt of regulatory approvals. If the reverse stock split is effected, shareholders of the Company who own fewer than 500 shares of the Company's common stock will receive a cash payment in lieu of a fraction of a share, and will no longer be shareholders of the Company. Shareholders holding 500 or more shares of the Company's common stock will remain shareholders after the reverse stock split, and will also be entitled to receive a cash payment in lieu of receiving a fraction of a share. The Board of Directors determined that $14.75per share outstanding prior to the reverse stock split would be a fair price to pay for shares that will be canceled in lieu of issuing a fraction of a share in connection with the reverse stock split. The Board of Directors has reserved the right to abandon the reverse stock split at any time if it believes the reverse stock split is no longer in the Company's best interests. If effected, the Company estimates that the aggregate amount of cash that would be payable 50 -------------------------------------------------------------------------------- to shareholders in lieu of fractional shares as a result of the reverse stock split would be approximately $8.8 million, which would be 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 thousandworth 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.
Emergency planning and cybersecurity
The Bank has developed a comprehensive business continuity plan to manage disruptions that affect customers or internal processes, whether caused by man-made or natural events. In modern banking, technology has taken on an increasingly important role, and the Bank also has a technology recovery component incorporated into the business continuity plan that provides procedures for recovering from a technology failure. The technology recovery procedures are tested and implemented from time to time. The recovery time objectives for the Bank's major technological processes range from eight hours to 80 hours, with the goal of enabling the Bank to maintain or resume operations with a minimum impact on its customers. As the results of testing are analyzed and as technology continues to advance, improvements are made in the Bank's processes and procedures as the plan evolves, although there can be no assurance that business disruption or operational losses will not occur. The rapid advances in computing and telecommunications technology over the past several decades have brought with them increasingly sophisticated methods of delivering financial services through electronic channels. Along with these advances, though, have come risks regarding the integrity and privacy of data, and these risks apply to banking, falling into the general classification of cybersecurity. The Bank has made substantial investments in multiple systems to ensure both the integrity of its data and the protection of the privacy of its customers' personal financial and identity information. While it is not possible for anyone to give an absolute guarantee that data will not be compromised, the Bank strives to provide a reasonable assurance that the financial and personal data that it holds are secure.
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