BANKGUAM HOLDING COMPANY The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of the Company and its wholly-owned subsidiary, the Bank. 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 consolidated financial statements and the accompanying notes presented elsewhere in this Annual Report.
Executive Summary
This summary is intended to identify the most important matters on which management focuses when it evaluates the financial condition and performance of the Bank. When evaluating financial condition and performance, management looks at certain key metrics and measures. The Bank's evaluation includes comparisons with peer group financial institutions and its own performance objectives established in internal planning processes. The primary activity of the Bank is commercial banking, as it has been since the Bank opened inGuam in 1972. The Company's operations are located entirely in theU.S. territories, theU.S. -affiliated nations of the western Pacific, and in theSan Francisco Bay area ofCalifornia . The largest community in the Bank's western Pacific market isGuam , followed by the Commonwealth of theNorthern Mariana Islands . The market includes a number of transportation-, travel- and tourism-related companies in the region, as well as substantialU.S. Department of Defense and otherU.S. federal government activities inGuam . The Company's customers are primarily transnational corporations, governments, closely-held businesses and individuals.
The COVID-19 pandemic and resulting governmental responses impacted our operations in 2020 and 2021. See "Note 2 - Summary of Significant Accounting Policies - COVID-19" for a discussion.
For the year endedDecember 31, 2021 , net income attributable to common stockholders was$20.0 million , or$2.06 per basic and diluted common share. For the year endedDecember 31, 2020 , net income was$11.9 million , or$1.23 per basic and diluted common share. The returns on average assets and average equity for the year endedDecember 31, 2021 , were 0.75% and 12.31%, respectively, compared to 0.55% and 7.21%, respectively, for 2020. The equity to asset ratios for the same periods were 6.47% and 7.53%, respectively, while the dividend payout ratios were 24.06% and 35.40%, respectively. As provided in the 2019 Form 10-K that was filed with theSecurities and Exchange Commission onMarch 19, 2020 , the returns on average assets and average equity for the year ended, were 0.83% and 10.23%, respectively. For that year, the equity to assets ratio and dividend payout ratio were 8.41% and 27.30%, respectively.
The following are major factors that impacted the Company's results of operations:
• Net interest income decreased 2.3% to
2020, due to a
by a decrease of
• The net interest margin decreased 85 basis points to 3.02% for the year
ended December 31, 2021 , compared with 3.87% for the year ended
December 31, 2020 . The decrease in the net interest margin for 2021
compared to 2020 was primarily due to a 44 basis point decrease in the
average yield on our loan portfolio, and a 9 basis point decrease in theaverage yield on our deposits with other financial institutions, partially
offset by a 7 basis point increase in the average yield on our securities
portfolio, and the decrease of 4 basis points on the average rates that we
paid on deposits.
• The provision for loan losses was $2.2 million for the year ended2021 provision decreased to reflect the improvement in credit quality of
the Bank's loans, the decrease in net charge-offs, the smaller loan
portfolio, and the decrease in the specific reserve for consumer loans
0-59 days delinquent, which resulted in a $7.0 million reversal to the
provision during the year. The provision recorded in 2021 is deemed bymanagement to provide a sufficient allowance for loan losses based on the
current risks to the overall loan portfolio and to net losses of
million during the year, including
off-balance sheet risk.
• Non-interest income was
2021,
2020 was primarily due to a
fees, largely due to the fee income from
increase in other income, primarily due to a $3.4 million gain from the
valuation of pre-existing interest in ASC Trust
24--------------------------------------------------------------------------------
LLC, the $2.2 million increase in cardholder net income, and the $962
thousand in merchant net income, partially offset by a $1.0 million
decrease in trustee fees.
• Non-interest expense was
2021, compared to
increase of
million in salaries and employee benefits, a $2.7 million increase in
furniture and equipment expenses, a $753 thousand increase in FDIC
assessment, a $630 thousand increase in general, administrative and other
expenses, primarily from ASC Trust LLC , a $623 thousand increase in
professional services, and a
partially offset by a $669 thousand decrease in other real estate owned
expenses.
• The 68.1% increase of net after tax income to $21.0 million in 2021
compared to $12.5 million 2020 was due to the $11.5 million rise in
non-interest income, and the decrease of $8.2 million in provision for
loan losses, partially offset by the
income, an increase of $7.7 million in non-interest expense, and the
increase of $1.6 million in income tax expense.
The following are important factors in understanding our current financial condition and liquidity position:
• Cash, interest-bearing deposits in other banks, and investment securities
available-for-sale collectively increased by
2020. This increase in liquid assets is due to an increase of
million in interest bearing deposits in other banks, partially offset by a
decrease of $10.7 million in securities available-for-sale, and a
reduction of $6.2 million in cash.
• Total assets increased by
was composed of a $269.8 million or 93.8% increase in cash and cash
equivalents to $557.4 million at December 31, 2021 compared to $287.6
million at December 31, 2020 , the increase in investment securities by
$255.0 million to $811.7 million at December 31, 2021 compared to $556.7
million at
of $8.3 million in other assets to $84.6 million at December 31, 2021
compared to $76.3 million at December 31, 2020 , partially offset by the
decrease of $109.0 million in net loans (net of deferred fees and the
allowance for loan losses) to
to
investment in unconsolidated subsidiary to zero at
compared to
primarily attributable to a decrease of
loans, to
year earlier, of which
principal paydowns of PPP loans, and the decrease of
gross consumer loans, to
million at
total liabilities increased by
deposits from the previous year end largely due to the receipt of various
COVID related federal funds, and the increase of
subordinated debt to
at December 31, 2020 . Enhancing the effect of the increase in total
liabilities, total stockholders' equity increased by $3.7 million ,
composed of the $16.1 million increase in retained earnings, a $7.3
million increase in non-controlling interest, and a
in additional paid-in common stock, partially offset by a
reduction in accumulated other comprehensive loss.
• Classified assets increased to
compared to
• The allowance for loan losses at
2.60% of total gross loans. The allowance for loan losses at
2020, was
• Nonperforming loans increased by
of total gross loans, at December 31, 2021 , from $14.9 million , or 1.04%
of total gross loans, at December 31, 2020 .
• Net loan charge-offs were
2021, as compared to the
• The ratio of noncore funding of
and over time deposits plus short-term borrowings) to total assets was
0.51% at December 31, 2021 , compared to $14.2 million , or 0.60% of total
assets, at December 31, 2020 .
• The loan-to-deposit ratio decreased to 52.2% at
compared to 67.6% at
in deposits, and the decrease in total gross loans by
25
--------------------------------------------------------------------------------• There are no conditions or events since the notification that management
believes have changed the Bank's category. The Company's capital ratios
significantly exceed regulatory requirements for a well-capitalized
financial institution. The leverage ratio of the Company was 5.79%, with a
Tier 1 risk-based capital ratio of 11.49%, a total risk-based capital
ratio of 15.16%, and a common equity Tier 1 risk-based capital ratio of
10.82% at
a Tier 1 risk-based capital ratio of 12.00%, a total risk-based capital
ratio of 14.31% and a common equity Tier 1 risk-based capital ratio of
11.33% at December 31, 2020 . The changes in our capital ratios from
December 31, 2020 , to December 31, 2021 , were primarily due to the
retention of
the decrease of
2021 and the increase in the average assets by
same period.
Deposits
The composition and cost of the Bank's deposit base are important in analyzing
the Bank's net interest margin and balance sheet liquidity characteristics. The
Bank's depositors are generally located in its primary market area. Depending on
loan demand and other funding requirements, the Bank also attracts deposits
through its interest rate pricing. The Bank monitors all deposits that may be
sensitive to interest rate changes to help ensure that liquidity risk does not
become excessive due to deposit migration. Deposits at December 31, 2021 , were
$2.53 billion , compared to $2.12 billion at December 31, 2020 . The 19.6%
increase was primarily due to the rise of $188.7 million , or 15.8%, in consumer,
commercial and government in deposits in Guam , the increase of $165.9 million
(45.6%) in the Commonwealth of the Northern Mariana Islands , primarily in
government deposits, the rise of $47.6 million (9.3%) in the Freely Associated
States of Micronesia , and $12.2 million (25.7%) in the Bank's deposits in the
California region. The significant increase in total deposits was primarily due
to the receipt of funds from various COVID-19 federal relief programs.
The Bank does not currently accept brokered deposits because it already maintains ample liquidity.
Liquidity
Our liquidity position refers to our ability to maintain cash flows sufficient to fund operations and to meet obligations and other commitments in a timely fashion. We believe that the Bank's liquidity position is more than sufficient to meet our operating expenses, borrowing needs and other obligations for 2021, and management has tested and determined that, even under severely stressed scenarios, the Bank's liquidity will be more than adequate to meet our requirements. AtDecember 31, 2021 , our liquidity increased by$259.0 million , 32.5% of total cash and cash equivalents and available-for-sale investment securities totaling$1.06 billion compared to$797.7 million atDecember 31, 2020 . Once the increases in our investment securities portfolio, goodwill, intangible assets, and other assets were accommodated, the large increase in our deposit liabilities and smaller increase in our equity were channeled into an increase in cash and cash equivalents. AtDecember 31, 2021 , we had$557.4 million in cash and cash equivalents and approximately$181.3 million in available borrowing capacity from various sources, including theFederal Home Loan Bank ("FHLB"), which is subject to the purchase of activity based stock at par equivalent to 4.00% of the borrowing, theFederal Reserve Bank of San Francisco ("FRB"), and Federal Funds facilities with several financial institutions. The Bank also had approximately$255.8 million in unpledged securities available atDecember 31, 2021 . Our loan-to-deposit ratio decreased to 52.2% atDecember 31, 2021 , compared to 67.6% atDecember 31, 2020 , as our gross loans decreased by 7.7% and our deposits increased by 19.6%.
Lending
Our loans originate almost entirely through the branch offices located in our primary market. As the Bank approached a saturation point in our island service area, we expanded our activities inCalifornia through our branch inSan Francisco . The total loan portfolio remains well diversified with commercial real estate loans accounting for 52.9% and commercial and industrial loans accounting for 22.4% of the total loan portfolio atDecember 31, 2021 . Construction loans decreased from 3.6% of the portfolio atDecember 31, 2020 , to 1.8% atDecember 31, 2021 . Residential mortgages and other consumer-related loans accounted for the remaining 22.9% of total loans atDecember 31, 2021 . The decrease in gross loans during 2021 compared to 2020 was primarily due to an decrease of$85.2 million , or 7.7%, in our commercial loan portfolio, and the decrease of$25.2 million , or 7.7%, decrease in consumer loans. The Bank also had a decrease of$5.8 million in loans sold to the Federal Home Loan Mortgage Corporation ("Freddie Mac") from$186.9 million atDecember 31, 2020 , to$181.1 million atDecember 31, 2021 , but these loans are off-book, except for the value of the associated mortgage servicing rights. The Bank exercises careful selectivity with respect to the types of loans it chooses to originate. 26 -------------------------------------------------------------------------------- With the passage of the Paycheck Protection Program, administered by theSmall 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 million and$56.6 million in PPP loans, respectively. AtDecember 31, 2021 , the outstanding principal balance of PPP loans was$25.7 million . As ofMarch 18, 2022 , a total of$132.3 million in PPP loans have been forgiven, of which$124.6 million were forgiven in 2021 and$7.7 million in 2020. It is the Bank's understanding that loans funded through the PPP program are fully guaranteed by theU.S. government. Should those circumstances change, the Bank could be required to establish additional allowance for loan loss through additional credit loss expense charged to earnings.
Net Interest Income
The management of interest income and expense is fundamental to the performance of the Company and the Bank. Net interest income, the difference between interest income and interest expense, is the largest component of the Bank's total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). The Bank, through its asset and liability management policies and practices, as overseen by itsAsset and Liability Committee , seeks to maximize net interest income without exposing itself to an excessive level of interest rate risk. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. This is discussed in more detail under Liquidity and Asset/Liability Management. In addition, as the market allows, we take measures and initiatives to improve our net interest margin, including increasing loan rates, maintaining interest rate floors on floating rate loans, reducing nonperforming assets, managing deposit interest rates and reducing higher-cost deposits. After several years of historically low rates theFederal Reserve increased the target Federal Funds Rate by 25 basis points four times during 2018, onMarch 21 ,June 13 ,September 26 andDecember 19 , ending in a target range from 2.25% to 2.50%. In 2019, the target Federal Funds Rate was cut three times onJuly 31 ,September 18 , andOctober 30 , ending the target range from 1.50% to 1.75%. OnMarch 3, 2020 , theFederal Open Market Committee 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% onMarch 16, 2020 . The decrease in short-term rates affected the rates applicable to the Bank's floating rate loans. In conjunction with the decrease in short-term interest rates, the overall cost of interest-bearing deposits, which represent the Bank's primary funding source, decreased by .04% by the end of 2021, which includes the issuance of subordinated debt onJune 27, 2019 andJune 29, 2021 . The decrease in the yields on the Bank's interest earnings assets reduced its net interest margin, from 3.87% in 2020 to 3.02% in 2021.
Management of Credit Risk
We continue to proactively identify, quantify and manage our problem loans. Early identification of problem loans and potential future losses helps enable us to resolve credit issues with potentially less risk and lower ultimate losses. We maintain an allowance for loan losses in an amount that we believe is adequate to absorb probable and projected incurred losses in the portfolio. While we strive to carefully monitor and manage credit quality and to identify loans that may be deteriorating, circumstances can change at any time that may result in future losses for loans included in the portfolio, that as of the date of the financial statements have not yet been identified as potential problem loans. Through established credit practices, we adjust the allowance for loan losses accordingly. However, because future events are uncertain, there may be loans that deteriorate, some of which could occur in an accelerated time frame. As a result, future additions to the allowance may be necessary. Because the loan portfolio contains a number of commercial loans, commercial real estate and construction loans with relatively large balances, deterioration in the credit quality of one or more of these loans may require a significant increase to the allowance for loan losses. Future additions to the allowance may also be required based on changes in the financial condition of borrowers, such as have resulted due to changing economic conditions. Additionally, federal and local banking regulators throughout our market area, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses may have a material adverse effect on our financial condition and results of operation.
We also maintain a reserve against potential credit risks associated with our unfunded off-balance sheet loan commitments.
Further discussion of the management of credit risk appears under "Provision for Loan Losses" and "Allowance for Loan Losses".
27
--------------------------------------------------------------------------------Capital Management
As part of its asset and liability management process, the Company continually assesses its capital position to take into consideration growth, expected earnings, risk profile and potential corporate activities that it may choose to pursue. During the past several years, the Bank's principal source of increases in capital has been retained earnings, supplemented by stock purchases through our Employee Stock Purchase Plan, and issuances of common and preferred stock. See Note 13 of Notes to Consolidated Financial Statements in Item 15 of this Annual Report for a description of the Employee Stock Purchase Plan. Since the formation of the Company in 2011, though, the Bank's assets have grown by 153.0%, prompting the Bank to seek additional sources of capital. Those more traditional sources of additional capital are finally catching up, having increased by 103.7% during the same period. A portion of the increase in capital was derived from the sale of additional common and preferred stock and the issuance of subordinated debt.
Results of Operations
The Bank earns income from two primary sources. The first is net interest
income, which is interest income generated by earning assets less a provision
for loan losses and interest expense on interest-bearing liabilities. The second
is non-interest income, which primarily consists of service charges and fees,
income from merchants for processing credit and debit card transactions,
non-interest income from holders of the Bank's credit cards, trustee fees and
net investment securities gains. The majority of the Company's non-interest
expenses are operating costs that relate to providing a full range of banking
services to our customers.
Distribution, Rate and Yield
The following Distribution, Rate and Yield table presents the average amounts
outstanding during 2021 and 2020 for the major categories of the Company's
balance sheet, the average interest rates earned or paid thereon, and the
resulting net interest margin on average interest earning assets for the periods
indicated. Average balances are based on monthly averages.
Years Ended December 31,
2021 2020
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/RateInterest earning assets: Short term investments1$ 610,821 $ 774 0.13 %$ 259,778 $ 559 0.22 % Investment Securities² 671,020 10,042 1.50 % 494,323 7,057 1.43 % Loans³ 1,385,296 71,686 5.17 % 1,375,582 77,151 5.61 % Total earning assets 2,667,137 82,502 3.09 % 2,129,683 84,767 3.98 % Noninterest earning assets 130,345 122,271 Total assets$ 2,797,482 $ 2,251,954 Interest-bearing liabilities: Interest-bearing checking accounts$ 343,016 $ 101 0.03 %$ 301,043 $ 246 0.08 % Savings accounts 1,126,599 332 0.03 % 712,491 996 0.14 % Certificates of deposit 29,241 34 0.12 % 298,921 72 0.02 % Subordinated debt 26,248 1,443 5.50 % 14,765 955 6.47 % Total interest-bearing liabilities 1,525,104 1,910 0.13 % 1,327,220 2,269 0.17 % Non-interest bearing liabilities 1,101,843 751,518 Total liabilities 2,626,947 2,078,738 Stockholders' equity 170,535 173,216 Total liabilities and stockholders' equity$ 2,797,482 $ 2,251,954 Net interest income$ 80,592 $ 82,498 Interest rate spread 2.97 % 3.81 % Net interest margin 3.02 % 3.87 %
1 Includes interest bearing deposit balances we maintain with other financial
institutions and the Federal Reserve Bank of San Francisco .
2 Includes all investment securities in the Available-for-Sale and the
Held-to-Maturity classifications. The Bank did not own any tax exempt
securities during 2021 and 2020.
3 Includes average balances of non-accrual loans.
28
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The Distribution, Rate and Yield table above sets forth the dollar amounts in
interest earned and paid for each major category of interest earning assets and
interest-bearing liabilities for the noted periods, as well as their respective
yields and costs, and the resulting interest rate spreads and net interest
margins.
The Bank's net interest margin, expressed as a percentage of average earning
assets, was 3.02% for 2021, down 85 basis points from 3.87% for 2020, even as
average earning assets increased by 25.2% during the year, from $2.13 billion in
2020 to $2.67 billion in 2021. The reason for the decrease in the net interest
margin was that our average earning assets interest income decreased by $2.3
million , from $84.8 million in 2020 to $82.5 million in 2021, partially offset
by the decrease in funding costs of 15.8%, from $2.3 million in 2020 to $1.9
million in 2021. Our average loan balances increased by $9.7 million , or 0.71%,
and the average yield on the entire loan portfolio decreased by 44 basis points
to 5.17% resulting in a decrease of interest earnings on loans by $5.5 million ,
or 0.44%. Yields on our investment securities portfolio increased by 7 basis
points and the yield on short term investments went down by 9 basis points.
Average total interest-bearing liabilities increased by 14.9% during 2021, to
$1.53 billion from $1.33 billion the previous year, primarily due to the growth
in consumer savings and demand accounts, commercial demand, checking and savings
accounts, and government demand, other interest bearing deposit and checking
accounts as a result of the funds received by depositors from the CARES Act.
Net interest income for the year ended December 31, 2021 , decreased by $1.9
million , to $80.6 million , compared to $82.5 million a year earlier, primarily
due to the 150 basis points (1.50%) cut in the federal funds rate in March 2020
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 .
A substantial portion of the Bank's earning assets are variable-rate loans that
re-price when the Bank's reference rate, which usually corresponds with the New
York prime lending rate, is changed. This is in contrast to a large base of core
deposits that are generally slower to re-price. This causes the Bank's balance
sheet to be asset-sensitive, which means that, all else being equal, net
interest margin will be higher during periods when short-term interest rates are
rising and lower when rates are falling. However, we will not necessarily have
to raise rates on the personal savings portion of our core deposits as general
market interest rates increase, increasing the sensitivity of our net interest
margin to rising interest rates.
The following table provides information regarding the changes in interest
income and interest expense, attributable to changes in rates and changes in
volumes that contribute to the total change in net interest income for the years
ending December 31, 2021 and 2020. Variances attributable to both rate and
volume changes are equal to the change in rate times the change in average
balance and are included below in the average volume column.
Year Ended December 31, 2021 vs. 2020
(In thousands)
Net Change in Attributable to:
Interest Change in Change in
Income/Expense Rate Volume
Interest income:
Short term investments $ 215 $ (230 ) $ 445
Investment securities 2,985 341 2,644
Loans (5,465 ) (5,968 ) 503
Total interest income (2,265 ) (5,857 ) 3,592
Interest expense:
Interest-bearing checking accounts (145 ) (157 ) 12
Savings accounts (664 ) (786 ) 122
Certificates of deposit (38 ) 276 (314 )
Other borrowings 488 (143 ) 631
Total interest expense (359 ) (810 ) 451
Net interest income $ (1,906 ) $ (5,047 ) $ 3,141
29--------------------------------------------------------------------------------
Provision for Loan Losses
Credit risk is inherent in the lending business. The Bank establishes an allowance for loan losses through charges to earnings, which are shown in the statements of income as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is allocated monthly and evaluated quarterly through a determination of the adequacy of the Bank's allowance for loan losses, and reset if necessary, charging the shortfall, if any, to the current quarter's expense. This has the effect of creating variability in the amount and frequency of charges to the Bank's earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in the Bank's market area. For 2021, the Bank had a provision for loan and credit losses of$2.2 million , and$6 thousand assigned to the reserve for unfunded credit commitments. The 2021 provision was$8.2 million less than the provision for 2020. The 2021 provision decreased due to the improvement in credit quality of the Bank's loans, the decrease in net charge-offs, the smaller loan portfolio, and the decrease in the specific reserve for consumer loans 0-59 days delinquent, which resulted in a$7.0 million reversal to the provision during the year. The provision recorded in 2021 is deemed by management to provide a sufficient allowance for loan losses due to net chargeoffs of$2.5 million during the year, as well as to maintain the allowance for loan losses at a level that is adequate to absorb all reasonably expected future losses and to express management's perception of risk in the existing loan portfolio, as well as changes in the quality of that portfolio. AtDecember 31, 2021 , management adjusted the economic risk factors to incorporate the current economic implications, which includes reduced tourism and higher unemployment due to the COVID-19 pandemic. The allowance for loan losses represented 2.60% and 2.43% of total gross loans atDecember 31, 2021 and 2020, respectively. Provisions for loan losses are charged to operating income to bring the allowance for loan losses to a level deemed appropriate by the Bank based on the factors discussed under "Allowance for Loan Losses." Non-interest income
The following table sets forth the various components of the Company's non-interest income:
Increase (decrease) 2021
Years Ended December 31, versus 2020
2021 2020 Amount Percent
Amount Amount Change Change
Non-interest income
Service charges and fees $ 11,842 $ 6,317 $ 5,525 87.5 %
Gain (loss) on sale of investment securities 323 265 58 -21.9 %
Income from merchant services 2,946 1,984 962 48.5 %
Income from cardholders, net 4,387 2,164 2,223 102.7 %
Trustee fees 670 1,695 (1,025 ) -60.5 %
Other income 7,759 3,967 3,792 95.6 %
Total non-interest income $ 27,927 $ 16,392 $ 11,535 70.4 %
While net interest income remains the largest single component of total
revenues, non-interest income is an important source, as well. In total, the
Bank received $27.9 million in non-interest income during 2021, an increase of
$11.5 million from the $16.4 million recorded for 2020. The increase from 2020
to 2021 was primarily due to a $5.5 million increase in service charges and
fees, largely due to the fee income from ASC Trust LLC , a $3.8 million increase
in other income, primarily due to a $3.4 million gain from the valuation of
pre-existing interest in ASC Trust LLC , the $2.2 million increase in cardholder
net income, and the $962 thousand in merchant net income, partially offset by a
$1.0 million decrease in trustee fees.
30
--------------------------------------------------------------------------------Non-interest expense
The following table sets forth the various components of the Company's non-interest expense:
Increase (decrease) 2021
Years Ended December 31, versus 2020
2021 2020 Amount Percent
Amount Amount Change Change
Non-interest expense:
Salaries and employee benefits $ 38,975 $ 35,754 $ 3,221 9.0 %
Occupancy 8,663 8,503 160 1.9 %
Equipment and depreciation 14,486 11,811 2,675 22.6 %
Insurance 1,973 1,918 55 2.9 %
Telecommunications 1,588 1,455 133 9.1 %
FDIC insurance assessment 2,155 1,402 753 53.7 %
Professional services 2,597 1,974 623 31.6 %
Contract services 1,726 1,891 (165 ) -8.7 %
Other real estate owned (599 ) 71 (670 ) -943.7 %
Stationery and supplies 371 502 (131 ) -26.1 %
Training and education 719 304 415 136.5 %
General, administrative and other 7,621 6,991 630 9.0 %
Total non-interest expense $ 80,275 $ 72,576 $ 7,699 10.6 %
The following table indicates the percentage of non-interest expense in each
category:
Years Ended December 31,
2021 2020
Percent Percent
Amount of Total Amount of Total
Non-interest expense:
Salaries and employee benefits $ 38,975 49 % $ 35,754 49 %
Occupancy 8,663 11 % 8,503 12 %
Equipment and depreciation 14,486 18 % 11,811 16 %
Insurance 1,973 1 % 1,918 4 %
Telecommunications 1,588 2 % 1,455 2 %
FDIC insurance assessment 2,155 3 % 1,402 2 %
Professional services 2,597 3 % 1,974 3 %
Contract services 1,726 2 % 1,891 3 %
Other real estate owned (599 ) -1 % 71 0 %
Stationery and supplies 371 0 % 502 1 %
Training and education 719 1 % 304 0 %
General, administrative and
other 7,621 9 % 6,991 10 %
Total non-interest expense $ 80,275 100 % $ 72,576 100 %
Management considers the control of operating expenses to be a critical element
of the performance of the Company and the Bank. As in years past, the Bank has
undertaken initiatives to contain its non-interest expense and improve its
efficiency. Nevertheless, total non-interest expense was $80.3 million for the
year ended December 31, 2021 , compared to $72.6 million for the year ended
December 31, 2020 , an increase of $7.7 million . This increase was largely the
result of higher salaries and benefits by $3.2 million , increase in furniture
and equipment expenses by $2.7 million , an increase in the FDIC insurance
assessment by $753 thousand , a rise in general, administrative and other
expenses, primarily from ASC Trust LLC , by $630 thousand , an increase in
professional services by $623 thousand , and an increase in education expenses by
$414 thousand . Those increases were partially offset by a decrease of $670
thousand in other real estate owned expenses, primarily due to the sale of an
property in California .
31--------------------------------------------------------------------------------
Income Tax Expense
The Company computes its provision for income taxes on a monthly basis. The effective tax rate is determined by applying the Bank's statutory income tax rate to pre-tax book income, as adjusted for permanent differences between pre-tax book income and actual taxable income. These permanent differences include, but are not limited to, tax-exempt interest income, increases in the cash surrender value of life insurance policies, certain expenses that are not allowed as tax deductions, and tax credits. The Bank pays income taxes inGuam and the Commonwealth of theNorthern Mariana Islands under a territorial "mirror" of theU.S. Internal Revenue Code, with payments made to the respective territorial governments instead of theU.S. Treasury ; there is no equivalent of a state income tax in either of these jurisdictions. The Bank also pays taxes to the governments of theRepublic of Palau , theFederated States of Micronesia , the Republic of theMarshall Islands and theState of California . The Bank's territorial and state income tax expense in 2021 was$5.1 million , as compared to an income tax expense of$3.5 million in 2020. The difference in the effective tax rate compared to the combined territorial, foreign and state statutory tax rate of 21% in effect for 2020 is primarily the result of the Bank's portfolio of tax-exempt loans to the government ofGuam totaling$34.0 million and$35.1 million atDecember 31, 2021 and 2020, respectively. Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles, leading to timing differences between the Bank's actual tax liability and the amount accrued for this liability based on book income. These temporary differences comprise the "deferred" portion of the Bank's tax expense or benefit, which is accumulated on the Bank's books as a deferred tax asset or deferred tax liability until such time as they reverse. At the end of the years 2021 and 2020, the Bank had a gross deferred tax asset of$14.0 million and$9.8 million , respectively. Realization of the net deferred tax asset is primarily dependent upon the Bank generating sufficient taxable income to obtain a benefit from the reversal of net deductible temporary differences, utilization of tax credit carry-forwards and the net operating loss carry-forwards forGuam , the Commonwealth of theNorthern Mariana Islands andCalifornia state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is "more likely than not" that a deferred tax asset will not be realized. The determination of whether the deferred tax assets will actually be realized is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions. In assessing the realization of deferred tax assets atDecember 31, 2021 , based on these factors, the Bank believed that it was more likely than not that the Bank will realize only$14.0 million of the benefits of these deductible differences. There was no valuation allowance for its deferred tax asset atDecember 31, 2021 . In assessing the realization of deferred tax assets atDecember 31, 2020 , the Bank believed that it was more likely than not that the Bank would realize only$8.5 million of the benefits of these deductible differences. Therefore, a valuation allowance of$1.3 million for the deferred tax asset was recorded atDecember 31, 2020 . Financial Condition As ofDecember 31, 2021 , total assets were$2.79 billion , an increase of 18.7% from$2.35 billion atDecember 31, 2020 . Total securities available-for-sale (at fair value) were$499.4 million , a decrease of 2.1% from$510.1 million atDecember 31, 2020 . The total loan portfolio, net of allowance for loan losses and deferred fees, was$1.28 billion , a decrease of$109.0 million , or 7.8% from$1.39 billion at year-end 2020. Interest bearing deposits in banks increased during 2021, rising to$520.7 million from$244.8 million at the end of 2020. Total deposits were$2.53 billion , an increase of 19.6% from$2.12 billion at year-end 2020. The Bank had no short-term borrowings atDecember 31, 2021 . The growth in deposits resulted from the receipt of various funds by our depositors from the CARES Act. Securities Portfolio
The following table reflects the estimated fair value of Available-for-Sale securities and the amortized cost of Held-to-Maturity securities, for each category for the past two years:
32
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Investment Portfolio
December 31, 2021
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
Securities Available-for-Sale
U.S. government agency and government
sponsored
enterprise (GSE) debt securities
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
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
December 31, 2020
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
Securities Available-for-Sale
U.S. government agency and government
sponsored
enterprise (GSE) debt securities
29 (206 ) 28,606
U.S. government agency or GSE
residential
mortgage-backed securities 176,912 6,447 - 183,359
Total $ 506,135 $ 6,530 $ (2,554 ) $ 510,111
Securities Held-to-Maturity
U.S. government agency and government
sponsored
enterprise (GSE) debt securities
15 (36 ) 4,494
U.S. government agency or GSE
residential
mortgage-backed securities 8,848 280 (10 ) 9,118
Total $ 46,584 $ 388 $ (61 ) $ 46,911
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The amortized cost and fair value of investment securities by contractual
maturity at
December 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 $ 310,372
December 31, 2020
Available-for-Sale Held-to-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Due within one year $ 5,115 $ 5,121 $ 11,990 $ 12,070
Due after one but within five years 13,255 13,432 2,325 2,358
Due after five but within ten years 129,708 131,340 26,214 26,348
Due after ten years 358,057 360,218 6,055 6,135
Total $ 506,135 $ 510,111 $ 46,584 $ 46,911
The securities portfolio is the second largest component of the Bank's interest
earning assets, and the structure and composition of this portfolio is important
to an analysis of the financial condition of the Bank and the Company. The
portfolio serves the following purposes: (i) it provides a source of pledged
assets for securing certain deposits and borrowed funds, as may be required by
law or by specific agreement with a depositor or lender; (ii) it can be used as
an interest rate risk management tool, since it provides a large base of assets,
the maturity and interest rate characteristics of which can be changed more
readily than the loan portfolio to better match changes in the deposit base and
other funding sources of the Bank; and (iii) it is an alternative interest
earning use of funds when loan demand is weak or when deposits grow more rapidly
than loans.
Approximately 61.5% of the Bank's securities at December 31, 2021 , were
classified under existing accounting rules as "Available-for-Sale" to allow
flexibility in the management of the portfolio. Accounting guidance requires
Available-for-Sale securities to be marked to fair market value, with an offset
to other comprehensive income (loss), a component of stockholders' equity,
recorded on a quarterly basis. The remaining 38.5% of the investment portfolio
was in Held-to-Maturity securities, which the Bank is willing and believes it
will be able to retain until they mature, and which are recorded on an amortized
cost basis.
The Bank's portfolio has historically been comprised primarily of: (i) U.S.
government agency and sponsored entities' debt securities for liquidity and
pledging; (ii) U.S. government agency and sponsored entities' mortgage-backed
securities, which in many instances can also be used for pledging, and which
generally enhance the yield of the portfolio; and (iii) U.S. government agency
pool securities, which generally enhance the yield of the portfolio. Since the
downgrade of many municipal obligations and their respective insurers in the
past few years, the Bank no longer holds municipal bonds, but may do so again
when markets become more stable.
Compared to December 31, 2020 , the Bank's securities portfolio increased by
$255.0 million to 29.1% of total assets at December 31, 2021 , from 23.7% at
December 31, 2020 . The Bank increased its holding of mortgage-back securities by
$208.4 million to $400.6 million at December 31, 2021 , from $192.2 million at
December 31, 2020 , and its holdings of U.S. government agency and sponsored
enterprise debt securities increased by $55.8 million , to $387.2 million during
the same periods. These increases were partially offset by the Bank's holdings
of U.S. government agency pool securities, which decreased by $9.2 million , to
$23.9 million at December 31, 2021 , from $33.1 million at December 31, 2020 . The
Bank has not used interest rate swaps or other derivative instruments to hedge
fixed rate loans or securities to otherwise mitigate interest rate risk.
Loans
The Bank's loans represent the largest portion of earning assets, substantially
greater than the securities portfolio or any other asset category, and the
quality and diversification of the loan portfolio is an important consideration
when assessing the financial condition of the Bank and the Company.
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Gross loans represented 47.3% of total assets at December 31, 2021 , as compared
to 60.9% at December 31, 2020 . The ratio of gross loans to deposits decreased to
52.2% at the end of 2021 from 67.6% at the end of 2020. The decrease is
attributed to the decrease in commercial loans to $1.02 billion in 2021 compared
to $1.10 billion in 2020. The decrease is largely due to the forgiveness of PPP
loans totaling $60.1 million during the comparative periods. In addition, total
consumer loans decreased by $25.2 million , primarily due to the paydowns and
payoffs in the portfolio in 2021. The Bank's gross loan portfolio decreased in
Guam , Northern Mariana, California , and in the Freely Associated States by a
total of $110.4 million or 7.7% during the period.
The Loan Distribution table that follows sets forth the Bank's gross loans
outstanding, deferred fee income amortized over the life of some loans, the
allowance for loan losses and the percentage distribution in each loan category
at the dates indicated.
Loan Portfolio
December 31, 2021 December 31, 2020
Amount Percent Amount Percent
Commercial
Commercial & industrial $ 295,835 22.4 % $ 366,942 25.6 %
Commercial mortgage 699,269 52.9 % 685,138 47.9 %
Commercial construction 23,588 1.8 % 51,785 3.6 %
Commercial agriculture 592 0.0 % 629 0.0 %
Total commercial 1,019,284 77.1 % 1,104,494 77.1 %
Consumer
Residential mortgage 135,377 10.2 % 127,371 8.9 %
Home equity 2,232 0.2 % 2,076 0.1 %
Automobile 18,220 1.4 % 19,923 1.4 %
Other consumer loans1 146,208 11.1 % 177,822 12.5 %
Total consumer 302,037 22.9 % 327,192 22.9 %
Gross loans 1,321,321 100.0 % 1,431,686 100.0 %
Deferred loan (fees) costs, net (3,223 ) (4,159 )
Allowance for loan losses (34,408 ) (34,805 )
Loans, net $ 1,283,690 $ 1,392,722 1 Comprised of other revolving and installment credit and overdrafts.
Approximately three fourths of the Bank's loan portfolio is concentrated in commercial loans (which include loans to governments), primarily in commercial real estate, multifamily rentals, hotels and gas stations, with the balance in working capital and equipment financing. These are followed by other consumer loans and residential mortgages. The Bank's gross loans were concentrated inGuam andSan Francisco , at 83.0% of our gross loan portfolio as ofDecember 31, 2021 , compared to 83.4% as ofDecember 31, 2020 . The only industry concentration that was considered significant atDecember 31, 2021 , was within our commercial mortgage loan portfolio, which was at 52.9% and 47.9% of total gross loans in 2021 and 2020, respectively. 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 inMarch 2020 under which affected commercial and consumer customers may have their loan payments deferred or otherwise adjusted for a period of up to 90 days. This temporary program ended onSeptember 30, 2020 . The Bank continues to process commercial and consumer deferral requests on a case-by-case basis. The Bank's commercial & industrial loans are made for working capital, financing the purchase of equipment and other business purposes. Commercial loans include loans with maturities ranging from thirty days to one year and "term loans" with maturities normally ranging from three to fifteen years. Short- term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans normally carry floating interest rates, with monthly payments of both principal and interest, but may be amortized over a longer period than the term of the loan, with a balloon payment at the end of the term. The Bank is an active participant in theSmall Business Administration (SBA), State Small Business Credit Initiative (SSBCI),Nor-Cal Financial Development Corp. andU.S. Department of Agriculture guaranteed lending programs, and has been approved by the SBA as a lender under the Preferred and Patriot Express Lender Programs. The Bank regularly makes such guaranteed loans, with an outstanding volume of$7.7 million atDecember 31, 2021 . 35 -------------------------------------------------------------------------------- As ofDecember 31, 2021 , commercial and residential real estate loans of$860.5 million consist primarily of adjustable and fixed rate loans secured by deeds of trust or mortgages on commercial and residential property, and comprised 65.1% of the total loan portfolio. The Bank's commercial mortgages atDecember 31, 2021 , consist of$699.3 million , or 52.9% of gross loans. Commercial construction loans comprise$23.6 million , or 1.8%, of gross loans. Residential mortgages, including home equity loans, were$137.64 million , or 10.4% of gross loans. Properties securing the commercial and residential real estate loans are located in the Bank's primary markets, which include theSan Francisco Bay area. The Bank's commercial real estate loans consist primarily of loans based on the borrower's cash flow and are secured by deeds of trust or mortgages on commercial and residential property to provide a secondary source of repayment. The Bank generally restricts commercial real estate term loans to no more than the lower of 75% of the property's appraised value or the purchase price of the property, whichever is lower, during the initial underwriting of the credit, depending on the type of property and its utilization. The Bank offers both fixed and floating rate loans. Maturities on commercial real estate loans are generally ten to fifteen years (with amortization up to thirty years and a balloon payment due at maturity), and maturities on residential mortgage loans are typically between 15 and 30 years, with many of those loans sold to the Federal Home Loan Mortgage Corporation with the retention of servicing rights. SBA and certain other real estate loans that can be sold in the secondary market may be granted for longer maturities. The Bank's construction loans primarily finance the development and construction of commercial and residential properties. The Bank uses underwriting guidelines to assess the likelihood of repayment from sources such as sale of the property or availability of permanent mortgage financing prior to making the construction loan. Construction loans decreased by$28.2 million to$23.6 million atDecember 31, 2021 , from$51.8 million atDecember 31, 2020 . Additionally, the Bank makes consumer loans for the purpose of financing automobiles, various types of consumer goods, and other personal purposes. Consumer loans generally provide for the monthly payment of principal and interest. Most of the Bank's consumer loans are either unsecured, secured by the personal property being purchased or, in the case of home equity loans, real property. AtDecember 31, 2021 , total gross loans decreased during the year by$110.4 million , or 7.7%, to$1.32 billion from$1.43 billion atDecember 31, 2020 . The decrease was largely attributed to a$85.2 million decrease in commercial loans to$1.02 billion atDecember 31, 2021 , from$1.10 billion atDecember 31, 2020 . This was primarily due to decreases in commercial & industrial loans by$71.1 million , commercial construction loans by$28.2 million , partially offset by commercial mortgage loans of$14.1 million . Further, the decrease was also due to the$25.2 million decrease during 2021 in consumer loans.
At
Since it first opened in 1972, the Bank has expanded its operations and its branch network, first inGuam , then in the other islands of our region and inSan Francisco, California . In the interests of enhancing performance and stability through market and industry diversification, the Bank has increased its focus on growth in theSan Francisco area in recent years, adding personnel with experience and expertise in theBay Area . The following table provides figures for gross loans in the Bank's administrative regions for the years endingDecember 31, 2021 and 2020: December 31, 2021 December 31, 2020 Guam $ 684,435 $
775,687
Commonwealth of theNorthern Mariana Islands 135,165
145,150
The Freely Associated States of Micronesia * 89,523 92,901 California 412,198 417,948 Total $ 1,321,321 $ 1,431,686 * The Freely Associated States are comprised of the Federated States of
Republic of the
As the table indicates, the Bank's total gross loans decreased by$110.4 million or 7.7% during 2021. Total loans inGuam decreased by$91.3 million , or 82.7% accounting for the largest source of total portfolio decline during 2021. The decrease in Commonwealth of theNorthern Mariana Islands by$10.0 million or 9.1% was second, followed by theCalifornia at$5.8 million , or 5.2%, and The Freely Associated States ofMicronesia by$3.4 million or 3.0%. 36 --------------------------------------------------------------------------------
Loan Maturities
The following table presents the maturity distribution of the Bank's loans as ofDecember 31, 2021 . The table also shows the distribution of such loans between those with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in theNew York prime rate, as reflected inThe Wall Street Journal , and theBank of Guam prime rate. At December 31, 2021 Due in More Than Due in Less 1 Year But Less Due in More Than 1 Year Than 5 Years Than 5 Years Non-Accrual Total (Dollars in thousands) Commercial loans$ 5,106 $ 306,632$ 691,788 $ 15,758 $ 1,019,284 Residential mortgages 72 8,194 127,682 1,660 137,608 Consumer loans 13,992 99,857 50,428 152 164,429 Total$ 19,170 $ 414,683$ 869,898 $ 17,570 $ 1,321,321 Variable rate loans$ 4,596 $ 188,263$ 702,157 $ 14,573 $ 909,589 Fixed rate loans 14,574 226,419 167,742 2,997 411,732 Total$ 19,170 $ 414,682$ 869,899 $ 17,570 $ 1,321,321 Loan Servicing As ofDecember 31, 2021 and 2020, there were$181.1 million and$186.9 million , respectively, in Federal Home Loan Mortgage Corporation loans that were serviced by the Bank.
Loan servicing rights are included in Accrued Interest Receivable and Other Assets on the consolidated balance sheets, and are reported at their estimated fair value.
Nonperforming Assets
Financial institutions generally have a certain level of exposure to credit
quality risk, and could potentially receive less than a full return of principal
and interest if a debtor becomes unable or unwilling to repay. Since loans are
the most significant assets of the Bank and generate the largest portion of its
revenues, the Bank's management of credit risk is focused primarily on loan
quality.
Banks have generally suffered their most severe earnings declines as a result of
customers' inability to generate sufficient cash flow to service their debts,
and/or downturns in national and regional economies and declines in overall
asset values, including real estate prices.
The Bank's credit policies identify allowable geographic credit concentrations.
In addition, these policies establish the Bank's underwriting standards and the
methods of monitoring credit quality on an ongoing basis. The Bank's internal
credit risk controls are focused on underwriting practices, credit originating
procedures, training, risk management techniques, and familiarity with loan
customers, as well as the relative diversity and geographic concentration of our
loan portfolio.
The Bank's credit risk may also be affected by external factors, such as the
level of interest rates, employment, general economic conditions, real estate
values, and trends in particular industries or geographic markets. As an
independent community bank serving a specific geographic area, the Bank must
contend with the unpredictable changes in the general regional market and,
particularly, primary local markets. The Bank's asset quality has been affected
in the past by the impact of national and regional recessions, consumer
bankruptcies, and depressed real estate values.
Nonperforming assets are comprised of the following: loans for which the Bank is
no longer accruing interest; restructured loans that are more than 90 days past
due; loans 90 days or more past due and still accruing interest (although they
are generally placed on non-accrual when they become 90 days past due, unless
they are both well-secured and in the process of revision or collection); and
other real estate owned ("OREO") that is acquired through foreclosures.
Management's classification of a loan as "non-accrual" is an indication that
there is reasonable doubt as to the full recovery of principal or interest on
the loan. At that point, the Bank stops accruing interest income, and reverses
any uncollected interest that had previously been accrued. These loans may or
may not be collateralized, and collection efforts are pursued. The Bank begins
recognizing interest income again only as cash interest payments are received
and it has been determined that the collection of all outstanding principal is
no longer in doubt. Loans may be restructured
37
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by management when a borrower has experienced some change in financial status
causing an inability to meet the original repayment terms and where the Bank
believes the borrower will eventually overcome those circumstances and make full
repayment. OREO consists of properties acquired by foreclosure or similar means
that management is offering or will offer for sale. Total OREO, net of OREO
reserves, was zero at December 31 , 2021and 2020.
Nonperforming Assets
The following table provides information about nonperforming assets by asset
type as of
December 31,
2021 2020
(Dollars in Thousands)
Nonperforming Assets:
Non-accrual loans past due 30 days or more $ 15,396 $ 12,807
Loans past due 90 days or more still accruing 1,090 2,127
Restructured loans past due 30 days - not included above - - Other Real Estate Owned, gross - - Total Nonperforming Assets$ 16,486 $ 14,934 The following table provides information about nonperforming loans by loan type: December 31, 2021 2020 (Dollars in Thousands) Nonperforming Loans: Commercial: Commercial & industrial$ 7,539 $ 8,751 Commercial mortgage 6,953 2,699 Total commercial 14,492 11,450 Consumer: Residential mortgage 957 2,218 Automobile 41 43 Other consumer 1 996 1,223 Total consumer 1,994 3,484 Total nonperforming loans$ 16,486 $ 14,934
1 Comprised of other revolving and installment credit and overdrafts.
Allowance for Loan Losses The Bank maintains its allowance for loan losses at a level which, in management's judgment, is adequate to absorb prospective credit losses inherent in the loan portfolio as of the balance sheet date. The amount of the allowance is based on management's evaluation of the collectability of the loan portfolio, including the nature and volume of the portfolio, credit concentrations, trends in historical loss experience, the level of certain classified and impaired loans, and economic conditions, along with their related impacts on specific borrowers and industry groups. The allowance is increased by provisions for loan losses, which are charged against earnings, and reduced by charge-offs, net of recoveries. Because of uncertainties inherent in the estimation process, management's estimate of potential credit losses in the loan portfolio and the related allowance may change from time to time. The Bank's allowance for loan losses decreased by$397 thousand to$34.4 million during 2021 from$34.8 million at the end of 2020. The decrease in the allowance for loan losses in 2021 was primarily due the improvement in credit quality of the Bank's loans, the decrease in net charge-offs, the smaller loan portfolio, and the decrease in the specific reserve for consumer loans 0-59 days delinquent, which resulted in a$7.0 million reversal to the provision during the year. The Bank had$5.0 million in charge-offs in 2021, which were partially offset by recoveries of previously charged-off loans of$2.4 million . 38 -------------------------------------------------------------------------------- Net loans charged-off includes the realization of losses in the portfolio that were partially recognized previously through provisions for loan losses and write-downs of loan principal valuations. Net charge-offs were$2.5 million in 2021, compared to$3.4 million in 2020. Net loan charge-offs decreased primarily due to loan deferrals related to COVID-19, and federal stimulus used to make loan payments. Historical net loan charge-offs are not necessarily indicative of the amount of net charge-offs that the Bank will realize in the future. The table in Note 6 to the Consolidated Financial Statements - Loans, under Credit Quality Indicators, provides a summary of the allocation of the allowance for loan losses for specific categories at the dates indicated. The allocation presented should not be interpreted as an indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each category represents the total amount available for charge-offs that may occur within these categories.
Allocation of Loan Loss Allowance
The material set forth in Note 6 of Notes to Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K is incorporated by reference.
Deposits
The composition and cost of the Bank's deposit base are important components in analyzing the Bank's net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other sections in this report. The Bank's liquidity is impacted by the volatility of deposits or other funding instruments or, in other words, by the propensity of that money to leave the institution for interest rate-related or other reasons. Deposits can be adversely affected if economic conditions in the Bank's market area weaken. Potentially, the most volatile deposits in a financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed$250,000 , as customers with balances of that magnitude are typically more rate-sensitive than customers with smaller balances. The following table summarizes the distribution of deposits for the periods indicated: December 31, 2021 2020 (Dollars in Thousands) Non-interest bearing deposits$ 981,537 $ 770,037 Interest bearing deposits: Demand deposits 401,753 322,933 Regular savings 801,101 754,042 Time deposits:$250,000 or more 14,201 14,201 Less than$250,000 15,696 14,569
Other interest bearing deposits 318,943 243,062 Total interest bearing deposits 1,551,694 1,348,807 Total Deposits
$ 2,533,231 $ 2,118,844 The Bank gathers deposits from among the communities it serves. The Bank's business is not generally seasonal in nature, and the Bank is not primarily dependent upon funds from sources outsidethe United States of America , but approximately 22.0% of its deposit base atDecember 31, 2021 , is acquired in the Micronesian islands that are politically organized in free association withthe United States and use theU.S. dollar as their currency. AtDecember 31, 2021 and 2020, 39.7% and 34.0% of deposits, respectively, were from domestic and foreign government sources. Non-interest and low interest-bearing demand deposits increased by$290.3 million , or 26.6%, to$1.38 billion atDecember 31, 2021 , compared to$1.09 billion atDecember 31, 2020 . Other interest bearing deposits, which are comprised of time deposit open accounts, increased by$75.9 million , or 31.2%, to$318.9 million atDecember 31, 2021 , compared to$243.1 million atDecember 31, 2020 . The significant increase in total deposits was primarily due to the receipt of funds from various COVID-19 federal relief programs. 39 -------------------------------------------------------------------------------- As mentioned earlier, the Bank has expanded its operations and its branch network since it first opened in 1972, first inGuam , then in the other islands of our region and inSan Francisco, California . As time has passed, the Bank has gathered market share in each of the islands. In recent years, in order to diversify its geographic market, the Bank has increased its focus on growth in theSan Francisco area. The following table provides figures for deposits in the Bank's administrative regions for the years endingDecember 31, 2021 and 2020: December 31, 2021 December 31, 2020 Guam $ 1,386,314 $ 1,197,656 Commonwealth of the Northern Mariana Islands 529,750 363,875 The Freely Associated States of Micronesia * 557,444 509,817 California 59,723 47,496 Total $ 2,533,231 $ 2,118,844
* The Freely Associated States are comprised of the Federated States of
Republic of the
During 2021, deposits increased by a total of$414.4 million . The growth in deposits were due to the$188.7 million increase from theGuam Branches,$165.9 million from the Commonwealth of theNorthern Mariana Islands branches,$47.6 million from the Freely Associated States branches, and$12.2 million in theCalifornia region. Overall, the Bank's deposit base increased by 19.6% during 2021. Deposit Maturity Distribution
At
Years endingDecember 31, 2022 $ 26,322 2023 1,091 2024 1,318 2025 295 2026 and thereafter 871 Total$ 29,897
The Bank provides and services government and business deposit accounts that are
frequently more than
Off-Balance Sheet Arrangements
In the normal course of business, the Bank makes commitments to extend credit to its customers as long as there are no violations of any conditions established in the associated contractual arrangements. These commitments are obligations that represent a potential credit risk to the Bank, yet are not reflected in any form within the Company's consolidated balance sheets other than in a modest contingency reserve against those commitments. Total unused commitments to extend credit were$162.6 million atDecember 31, 2021 , as compared to$159.4 million atDecember 31, 2020 . Unused commitments represented 12.3% of outstanding gross loans atDecember 31, 2021 and 11.1% atDecember 31, 2020 . The effect on the Bank's revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted, because there is no certainty that these lines of credit will ever be fully utilized, if at all. For more information regarding the Company's off-balance sheet arrangements, see Note 15 to the financial statements located elsewhere herein. 40 -------------------------------------------------------------------------------- The following table presents the Bank's commitments to extend credit for the periods indicated:December 31, 2021 2020
Commitments to extend credit
Letters of credit:
Standby letters of credit
$ 45,605 $ 55,401 Contractual Obligations
The Bank utilizes facilities, equipment and land under various operating leases with original terms ranging from 1 to 99 years.
The following table provides the maturities of lease liabilities atDecember 31, 2021 : Operating Leases (a) Total 2022$ 2,780 $ 2,780 2023 2,532 2,532 2024 2,420 2,420 2025 2,288 2,288 2026 2,054 2,054 After 2025 33,515 33,515 Total lease payments 45,589 45,589 Less: Interest (b) 21,477 21,477
Present value of lease liabilities (c)
Note: For leases commencing prior to 2020, minimum lease payments exclude payments to landlords for real estate taxes and common area maintenance.
(a) Operating lease payments include $21.5 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 years ended December 31, 2021 and 2020, approximated $431
thousand , and $359 thousand , respectively.
Additionally, the Bank leases office space to third parties, with original lease
terms ranging from 1 to 3 years and option periods ranging up to 12 years. At
December 31, 2021 , minimum future rents to be received under non-cancelable
operating sublease agreements were $44 thousand and $26 thousand for the years
ending December 31, 2022 and 2023, respectively. Although it is possible that
one or more of these leases will be renewed, there is no certainty upon which to
base an estimate.
A summary of rental activities for years ended December 31, 2021 and 2020, is as
follows:
For Years Ended December 31,
2021 2020
Rent expense $ 4,063 $ 3,987
Total rent expense $ 4,063 $ 3,987
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Liquidity and Asset/Liability Management
Liquidity refers to the Bank's ability to maintain cash flows sufficient to fund operations and to meet obligations and other commitments in a timely and cost-effective fashion. At various times the Bank requires funds to meet short-term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or liability repayments. The Bank's large base of core deposits is an integral part of its ability to manage its liquidity position appropriately. These core deposits are generated by offering traditional banking services in its service areas and have, historically, been a stable source of funds. To manage liquidity needs properly, cash inflows must be timed to coincide with anticipated outflows, or other sufficient liquid resources must be available to meet varying demands. The Bank manages cash and investment securities in order to be able to meet unexpected, sudden changes in levels of its assets or deposit liabilities without maintaining excessive amounts of balance sheet liquidity. Excess balance sheet liquidity can negatively impact the Bank's interest margin. In order to meet short-term liquidity needs, the Bank may utilize overnight Federal Funds purchases and other borrowing arrangements with correspondent banks, and use interest rate pricing to attract new deposits from local sources; it also maintains collateralized lines of credit with the FHLB and the FRB. In addition, the Bank can obtain cash for temporary needs by selling securities that it classifies as Available-for-Sale. AtDecember 31, 2021 , the Bank had a decrease in gross loans of$110.4 million fromDecember 31, 2020 . One of the measures of liquidity is our loan-to-deposit ratio, based upon gross loans, which decreased to 52.2% atDecember 31, 2021 , compared to 67.6% atDecember 31, 2020 . Each calendar quarter, the Bank performs a six-month cash flow analysis to ensure that it will have sufficient liquidity to meet all of its potential cash obligations under a worst-case scenario, and maintains more than adequate liquidity under those hypothetical conditions. Management believes we have sufficient cash to meet the demands of the distribution of funds under the CARES Act. However, we will monitor our vault cash on a daily basis, and if the need arises we will acquire additional cash by drawing down our deposits with other financial institutions, including theFederal Bank of San Francisco .
FHLB, FRB and Other Borrowings and Available Lines of Credit
The Bank has off-balance sheet liquidity in the form of Federal Funds purchase arrangements with correspondent banks, as well as collateralized borrowing arrangements with the FHLB and the FRB. The Bank can borrow from the FHLB on a short-term (typically overnight) or long-term (more than one year) basis. AtDecember 31, 2021 , the Bank had no long-term borrowings. The Bank had an available line of credit of$128.5 million , which is subject to the purchase of activity based stock at par equivalent to 4.00% of the borrowing, with the FHLB ofDes Moines atDecember 31, 2021 . The Bank can also borrow from the FRB's discount window. It had$18.5 million of investment securities pledged to the FRB San Francisco as collateral on an available line of credit of$17.8 million atDecember 31, 2021 , none of which credit was outstanding. AtDecember 31, 2021 , the Bank had arrangements for Federal Funds purchases of up to a total of$35.0 million from three of itsU.S. correspondent financial institutions. The Bank had no Federal Funds purchases outstanding atDecember 31, 2021 and 2020.
At
Capital Resources
The Bank is subject to various regulatory capital requirements administered bythe United States federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's 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 its 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, Tier 1 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). Management believes, as ofDecember 31, 2021 and 2020, that the Bank met all capital adequacy requirements to which it is subject. As ofDecember 31, 2021 , the Bank's capital ratios each exceeded theFDIC'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 notification that management believes have changed the Bank's category. 42 -------------------------------------------------------------------------------- The Bank continues to receive a large influx of deposits from federal relief programs due to the COVID-19 pandemic, which largely increased its total cash and cash equivalents on its balance sheet resulting in an increase in its average assets inDecember 31, 2021 by approximately$600.2 million to$2.91 billion from$2.31 billion inDecember 31, 2020 . This growth resulted in an adverse impact on its ratio of Tier 1 capital to average assets. Management believes that the Bank has the capacity to absorb the growth in total assets, and the tools needed to move deposits off its balance sheet through its Trust services to continue to be above the well capitalized standards under the regulatory framework for prompt corrective action. The current capital standards under theU.S. adoption of Basel III establish a capital conservation buffer, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer is 2.5% of common equity Tier 1 capital. Failure to meet these standards could result in restrictions on our ability to pay dividends and to pay discretionary bonuses to executive management.
The Company's actual capital amounts and ratios as of
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
At 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 %
At December 31, 2020 :
Total capital (to Risk
Weighted Assets) $ 206,381 14.307 % $ 115,401 8.000 % $ 144,252 10.000 %
Tier 1 capital (to Risk
Weighted Assets) $ 173,141 12.003 % $ 86,551 6.000 % $ 115,401 8.000 %
Tier 1 capital (to Average
Assets) $ 173,141 7.466 % $ 92,765 4.000 % $ 115,956 5.000 %
Common Equity Tier 1
Capital (to Risk Weighted
Assets) $ 163,359 11.325 % $ 64,913 4.500 % $ 93,764 6.500 %
Market Risk
Market risk is the risk of loss of future earnings, fair values or cash flows
that may result from changes in the price of a financial instrument. The value
of a financial instrument may change as a result of changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices and other
market changes that affect market risk sensitive instruments. Market risk is an
attribute of all market risk sensitive financial instruments, including
securities, loans, deposits and borrowings, as well as a company's role as a
financial intermediary in customer-related transactions. The objective of market
risk management is to avoid excessive exposure of the company's earnings and
equity to loss, and to reduce the volatility inherent in certain types of
financial instruments.
Interest Rate Risk Management
Market risk arises from changes in interest rates, exchange rates, commodity
prices and equity prices. The Bank's market risk exposure is primarily that of
interest rate risk, and it has established policies and procedures to monitor
and limit earnings and balance sheet exposure to changes in interest rates. The
Bank does not engage in the trading of financial instruments, and has only
nominal direct exposure to currency exchange rate risk, but has indirect
exposure to exchange rate risk because of the dominant position of foreign
tourism in its primary markets.
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The principal objective of interest rate risk management (often referred to as
"asset/liability management") is to manage the financial components of the
Bank's balance sheet, as well as their characteristics, in a manner that will
optimize the risk/reward equation for earnings and capital in relation to
changing interest rates. The Bank's exposure to market risk is reviewed on a
monthly basis by its Asset and Liability Committee . Interest rate risk is the
potential for economic losses due to future interest rate changes. These
economic losses can be reflected as a loss of future net interest income and/or
a loss of current fair market values. The objective is to measure the effect on
net interest income and to adjust the balance sheet to minimize the inherent
risk while simultaneously maximizing income. Management realizes certain risks
are inherent, and that the goal is to identify and manage those risks.
Management uses two methodologies to manage interest rate risk: (i) a standard
GAP analysis; and (ii) an interest rate shock simulation model.
The planning of asset and liability maturities is an integral part of the
management of an institution's net interest margin. To the extent that the
maturities of assets and liabilities do not match in a changing interest rate
environment, the net interest margin may change over time. Even with perfectly
matched re-pricing of assets and liabilities, risks remain in the form of
prepayment risk for some loans and securities, or in the form of risks of delays
in the adjustment of interest rates applying to either earning assets with
floating rates or to interest bearing liabilities. The Bank has generally been
able to control its exposure to changing interest rates by maintaining a
substantial proportion of its portfolio in floating interest rate loans and a
majority of its time deposits with relatively short maturities.
Interest rate changes do not affect all categories of assets and liabilities
equally or at the same time. Varying interest rate environments can create
unexpected changes in prepayment levels of assets and liabilities, which may
have a significant effect on the net interest margin and are not reflected in
the interest sensitivity analysis table. Because of these factors, an interest
sensitivity gap report may not provide a complete assessment of the exposure to
changes in interest rates.
The Bank uses modeling software for asset/liability management in order to
simulate the effects of potential interest rate changes on its net interest
margin, and to calculate the estimated fair values of the Bank's financial
instruments under different interest rate scenarios. The program utilizes
current balances, interest rates, maturity dates and re-pricing information for
individual financial instruments, and incorporates assumptions on the
characteristics of embedded options along with pricing and duration for those
instruments to project the effects of a given interest rate change on the Bank's
interest income and interest expense. Rate scenarios consisting of key rate and
yield curve projections are run against the Bank's investment, loan, deposit and
borrowed funds portfolios. These rate projections can be shocked (an immediate
and parallel change in all base rates, up or down) and ramped (with incremental
increases or decreases in rates over a specified time period), based on current
trends and forecasts, including stable economic conditions.
The following table sets forth the estimated changes in the Bank's net interest
income that would result from the designated instantaneous parallel shifts in
interest rates noted, as of December 31, 2021 . Computations of prospective
effects of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, loan prepayments and deposit
decay, and should not be relied upon as indicative of actual results. (Please
note that, in the current interest rate environment, the larger reductions in
rates presented in the analysis are unlikely to occur.)
Increase/(Decrease)
in Estimated Net Interest Income
Amount Percent
(Dollars in thousands)
Change in Interest Rates (basis points)
+400 $ 36,248 48.01 %
+300 $ 27,076 35.86 %
+200 $ 17,926 23.74 %
+100 $ 9,164 12.14 %
± 0 $ - 0.00 %
-100 $ (3,444 ) -4.56 %
-200 $ (5,789 ) -7.67 %
-300 $ (7,128 ) -9.44 %
-400 $ (7,459 ) -9.88 %
These data do not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could improve or attenuate the actual impact on net interest income.
As with any method of gauging interest rate risk, there are certain shortcomings
inherent to the methodology noted above. The model assumes interest rate changes
are instantaneous, and result in parallel shifts in the yield curve. In reality,
rate changes are rarely
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instantaneous. The use of the simplifying assumption that short-term and
long-term rates change by the same degree also disregards historic rate change
patterns, which rarely show parallel yield curve shifts. Further, the model
assumes that certain assets and liabilities of similar maturity or period to
re-pricing will react in the same way to changes in rates. In reality, certain
types of financial instruments may react in advance of changes in market rates,
while the reaction of other types of financial instruments may lag significantly
behind the change in general market rates. Additionally, the methodology noted
above does not reflect the full impact of annual and lifetime restrictions on
changes in rates for certain assets, such as adjustable rate loans. When
interest rates change, actual loan prepayments and actual early withdrawals from
time certificates may deviate significantly from the assumptions used in the
model. Finally, this methodology does not measure or reflect the impact that
higher rates may have on adjustable-rate loan clients' ability to service their
debt. All of these factors are considered in less formulaic ways in monitoring
the Bank's exposure to interest rate risk.
Critical Accounting Policies
General
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America (generally accepted accounting principles, or "GAAP"). The financial information contained within our consolidated financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained, either when earning income, recognizing an expense, recovering an asset or relieving a liability. In certain instances, we use a discount factor and prepayment assumptions to determine the present value of assets and liabilities. A change in the discount factor or prepayment speeds could increase or decrease the values of those assets and liabilities, which would result in either a beneficial or adverse impact to our financial results. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. Other estimates that we use are related to the realization of our deferred tax assets and the expected useful lives of our depreciable assets. In addition, GAAP itself may change from one previously acceptable method to another, although the economics of our transactions would remain the same.
Fair Value of Securities
In accordance with GAAP, the Bank revalues the Available-for-Sale component of
its investment portfolio on a quarterly basis, and records any unrealized gain
or loss as an adjustment to other comprehensive income in its equity accounts.
Held-to-Maturity securities are recorded at their amortized book value. The Bank
also evaluates whether any of its security holdings are Other Than Temporarily
Impaired ("OTTI"), but has determined that, as of December 31, 2021 , none of its
securities are deemed to be OTTI.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the potential losses in our loan portfolio. Our accounting for estimated loan losses was previously discussed in this Item 7 under the heading, "Allowance for Loan Losses."
Deferred Tax Asset
Our net deferred tax asset arises from temporary differences between the carrying amount of assets and liabilities reported in the financial statements and the amounts used for income tax return purposes. Our accounting for Deferred Tax Asset was previously discussed under the heading "Income Tax Expense".
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
As a financial institution, the Bank's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of the Bank's assets and liabilities and the market value of all interest-earning assets, other than those which have a short term to maturity. Based upon the nature of the Bank's operations, the Bank is not subject to significant direct foreign exchange or commodity price risks. The Bank has no market risk sensitive instruments, or any other financial instruments, that are held for trading purposes. As ofDecember 31, 2021 , the Bank did not use interest rate derivatives to hedge its interest rate risk. The information concerning quantitative and qualitative disclosure about market risk called for by Item 305 of Regulation S-K is included as part of Item 7 of this Annual Report. 45
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