bkgmf-10q_20170630.htm

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

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

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

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

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

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

As of August 9, 2017, the registrant had outstanding 9,280,301 shares of common stock.

For purposes of this Quarterly Report, the terms the “Company,” “we,” “us” and “our” refer to BankGuam Holding Company and its subsidiaries. This Quarterly Report on Form 10-Q contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These may include, among other things, statements regarding:

We are not able to predict all of the factors that may affect future results. Forward-looking statements may be preceded by, followed by or include the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “is designed to” and similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about our businesses and the environment in which they operate that could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” included in filings we make from time to time with the U.S. Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for our fiscal year ended 2016, and our other Quarterly Reports on Form 10-Q filed by us in fiscal 2017. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. New information, future events or risks could cause the forward-looking statements we discuss in this Quarterly Report not to occur. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Quarterly Report.

	June 30, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	32,026		$	25,738
Interest bearing deposits in banks		179,660			150,913
Total cash and cash equivalents		211,686			176,651
Restricted cash		400			400
Investment in unconsolidated subsidiary		3,088			3,025
Investment securities available-for-sale, at fair value		440,885			419,880
Investment securities held-to-maturity, at amortized cost		92,922			96,167
Federal Home Loan Bank stock, at cost		2,303			1,855
Loans, net of allowance for loan losses ($15,371 and $15,435, respectively)		1,144,506			1,158,045
Accrued interest receivable		4,923			4,758
Premises and equipment, net		18,200			17,825
Other assets		48,803			42,946
Total assets	$	1,967,716		$	1,921,552

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	508,886		$	469,451
Interest bearing		1,310,277			1,309,219
Total deposits		1,819,163			1,778,670
Accrued interest payable		116			122
Other liabilities		11,895			10,558
Total liabilities		1,831,174			1,789,350
Commitments and contingencies (Note 6)

Stockholders’ equity:
Common stock $0.2083 par value; 48,000 shares authorized; 9,312 and 9,300 shares issued and 9,280 and 9,268 shares outstanding at 6/30/17 and 12/31/16, respectively		1,941			1,938
Preferred stock $100.00 par value; 300 shares authorized; 9.8 shares issued and outstanding		980			980
Additional paid-in capital, Common stock		20,040			19,917
Additional paid-in capital, Preferred stock		8,803			8,803
Retained earnings		108,181			104,626
Accumulated other comprehensive loss		(3,113	)		(3,772	)
Common stock in treasury, at cost (32 shares)		(290	)		(290	)
Total stockholders’ equity		136,542			132,202
Total liabilities and stockholders’ equity	$	1,967,716		$	1,921,552

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
Interest income:
Loans	$	18,079		$	18,116	$	35,231		$	34,748
Investment securities		1,941			1,249		3,693			2,451
Deposits with banks		248			104		431			206
Total interest income		20,268			19,469		39,355			37,405
Interest expense:
Savings deposits		514			445		1,006			868
Time deposits		38			34		76			72
Other borrowed funds		-			32		-			35
Total interest expense		552			511		1,082			975
Net interest income		19,716			18,958		38,273			36,430
Provision for loan losses		1,184			1,185		2,367			2,330
Net interest income, after provision for loan losses		18,532			17,773		35,906			34,100

Non-interest income:
Service charges and fees		1,452			1,531		2,850			2,964
Gain (loss) on sale of investment securities		-			120		(13	)		130
Income from merchant services		598			511		1,188			767
Cardholders income		191			430		359			695
Trustee fees		259			221		455			359
Other income		678			707		1,378			1,466
Total non-interest income		3,178			3,520		6,217			6,381
Non-interest expense:
Salaries and employee benefits		8,555			8,082		16,925			15,496
Occupancy		1,695			1,576		3,251			3,118
Equipment and depreciation		2,116			1,800		4,138			3,508
Insurance		404			413		809			813
Telecommunications		412			402		849			801
FDIC assessment		343			321		739			646
Professional services		485			579		937			1,164
Contract services		453			491		957			932
Other real estate owned		11			15		66			16
Stationery and supplies		223			265		418			484
Training and education		362			315		668			515
General, administrative and other		2,198			2,201		4,655			4,128
Total non-interest expense		17,257			16,460		34,412			31,621
Income before income taxes		4,453			4,833		7,711			8,860
Income tax expense		1,184			1,427		2,157			2,536
Net income		3,269			3,406		5,554			6,324
Preferred stock dividend		(136	)		-		(276	)		-
Net income attributable to common stockholders	$	3,133		$	3,406	$	5,278		$	6,324
Earnings per common share:
Basic	$	0.35		$	0.37	$	0.60		$	0.68
Diluted	$	0.35		$	0.37	$	0.60		$	0.68
Dividends declared per common share	$	0.10		$	0.10	$	0.20		$	0.20
Basic weighted average common shares		9,274			9,248		9,271			9,248
Diluted weighted average common shares		9,274			9,248		9,271			9,248

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

	Six Months Ended June 30,
	2017			2016
Cash flows from operating activities:
Net income	$	5,554		$	6,324
Adjustments to reconcile net income to net cash provided by operating activities:					-
Provision for loan losses		2,367			2,330
Depreciation		1,642			1,670
Amortization of fees, discounts and premiums		663			729
Loss on sales of other real estate owned, net		18			67
Proceeds from sales of loans held for sale		8,473			8,921
Origination of loans held for sale		(8,473	)		(8,921	)
Increase in mortgage servicing rights		(12	)		(87	)
Realized loss (gain) on sale of available-for-sale securities		13			(130	)
Realized gain on sale of premises and equipment		(23	)		(11	)
Income from equity investment in unconsolidated subsidiary		(46	)		-
Dividends received from unconsolidated subsidiary		115			-
Net change in operating assets and liabilities:
Accrued interest receivable		(166	)		(557	)
Other assets		(6,328	)		(529	)
Accrued interest payable		(6	)		23
Other liabilities		1,337			4,490
Net cash provided by operating activities		5,128			14,319

Cash flows from investing activities:
Purchases of available-for-sale securities		(59,280	)		(91,589	)
Proceeds from sales of available-for-sale securities		12,896			24,714
Maturities, prepayments and calls of available-for-sale securities		25,337			9,081
Maturities, prepayments and calls of held-to-maturity securities		3,269			4,024
Loan originations and principal collections, net		11,317			(90,170	)
Proceeds from FHLB stock redemption		(448	)		(93	)
Proceeds from sales of other real estate owned		322			345
Proceeds from sales of premises and equipment		-			11
Purchases of premises and equipment		(1,993	)		(1,698	)
Net cash (used in) provided by investing activities		(8,580	)		(145,375	)

Cash flows from financing activities:
Net increase in deposits		40,493			165,747
Proceeds from issuance of common stock		125			109
Dividends paid		(2,131	)		(1,849	)
Net cash used in financing activities		38,487			164,007
Net change in cash and cash equivalents		35,035			32,951
Cash and cash equivalents at beginning of period		176,651			100,799
Cash and cash equivalents at end of period	$	211,686		$	133,750

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	598		$	493
Income taxes		3,665			1,847
Supplemental disclosure of noncash investing and financing activities:
Net change in unrealized loss on held-to-maturity securities, net of tax		215			219
Net change in unrealized (gain) loss on available-for-sale securities, net of tax		444			2,558
Other real estate owned transferred from loans, net		260			352
Other real estate owned transferred to loans, net		(116	)		(54	)

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

The accompanying condensed consolidated financial statements include the accounts of BankGuam Holding Company (“Company”) and its wholly-owned subsidiaries, Bank of Guam (“Bank”) and BankGuam Investment and Insurance Services (“BGIIS”). The Company is a Guam corporation organized on October 29, 2010, to act as a holding company of the Bank, a Guam banking corporation, a 23-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. BankGuam Investment and Insurance Services was incorporated in Guam in 2015 and initially capitalized during the first quarter of 2016. The Company executed an agreement to purchase up to 70% of ASC Trust Corporation through 2021, including its initial investment of 25% made in July 2016.

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

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

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

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

These unaudited condensed consolidated financial statements have been prepared on a basis consistent with prior periods, and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2016, and the notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 on March 14, 2017.

Our condensed consolidated financial condition at June 30, 2017, and the condensed consolidated results of operations for the three and six months ended June 30, 2017, are not necessarily indicative of what our financial condition will be as of December 31, 2017, or of the results of our operations that may be expected for the full year ending December 31, 2017.

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

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which simplifies the principles applied to income taxes on stock compensation, including the timing of recognition, the classification of tax benefits or deficiencies on the statement of cash flows, the treatment of those taxes on the income statement, and the measurement of liability-classified awards at fair value or intrinsic value. Although this standard was adopted effective January 1, 2017, the Company has issued no stock options or phantom stock options to date, so this update has had no impact on our consolidated financial position or results of operation at this time.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which amends ASU 2014-02 by eliminating Step 2 from the goodwill impairment test, which had required a quantitative measure of each reporting unit’s goodwill by comparing the implied fair value to the carrying amount of that goodwill. As the Company has never had to conduct a Step 2 evaluation of goodwill, this update will have no effect on our consolidated financial position or results of operations. Although adoption of this standard is not required of the Company until January 1, 2020, we adopted the update effective March 31, 2017.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. Among other objectives, it is intended to provide more useful information to the users of financial statements by making the definition and recognition of revenue more comparable across reporting entities, industries, jurisdictions and capital markets. As deferred by ASU No. 2015-14, this Standard is effective January 1, 2018. We are currently reviewing contracts with customers that would be subject to this update, and we will continue to evaluate the prospective impact of ASU 2014-09 on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information and to address certain aspects of the recognition, measurement, presentation and disclosure of the fair value, including impairment assessments, of financial instruments. We are currently evaluating the impact of ASU 2016-01 on the presentation of and disclosure related to our consolidated financial statements which is effective beginning January 1, 2018.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, a new Topic intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements on the basis that it is important that users of financial statements have a complete and understandable picture of an entity’s leasing activities. The Company is anticipating electing an accounting policy to not recognize lease assets and lease liabilities for leases with a term of twelve months or less. We do not believe that our current leasing activities will require complicated disclosure, but we will continue to evaluate the impact of ASU 2016-02 on our consolidated financial statements which is effective beginning January 1, 2019.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)”, to amend the standards for the measurement of credit losses on financial instruments by replacing the historical incurred loss impairment methodology of determining the level of the allowance for loan and lease losses (ALLL), including losses associated with held-to-maturity securities, with a more decision-useful methodology that reflects expected credit losses over the life of a financial instrument based upon historical experience, current conditions, and reasonable and supportable forecasts in determining the ALLL level, as well as the reserve for off-balance-sheet credit exposures. The Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on our Consolidate Financial Statements, and has taken steps for the implementation when it becomes effective beginning January 1, 2020, such as gathering pertinent data, consulting with outside professionals and evaluating its current IT systems. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. This update requires that the service cost component of the Bank’s Supplemental Executive Retirement Program (SERP) be recorded and reported separately from the other cost component(s), in the same line item as other compensation costs related to services rendered by the beneficiary employees during the reporting period. The Company currently reports both the service cost and the other cost component(s) as a portion of General, administrative and other expense, whereas this update will require that the service cost component be reported as a portion of Salaries and employee benefits. This update also requires that the details of the components of the SERP be reported for the interim periods, in addition to the annual reporting of these costs. We are currently evaluating the impact of ASU 2017-07 on our consolidated financial statements which is effective beginning January 1, 2018.

Also in March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. This update shortens the amortization period of a callable security that is held at a premium to the earliest call date of that security instead of the contractual life of the security. Although the Company does not currently hold any callable securities at a premium, we may do so in the future. Unless such securities are purchased by us, we do not believe that ASU 2017-08 will have an impact on our consolidated financial statements effective beginning January 1, 2019.

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”, which clarifies the application of the guidance in Topic 718 on stock compensation in order to reduce the diversity in practice and to reduce the cost and complexity of applying the Topic to a change in the terms or conditions of a share-based payment award. Although this standard will be adopted effective January 1, 2018, the Company has issued no stock options or phantom stock options to date, so this update is expected to have no impact on our consolidated financial position or results of operation at this time.

Basic earnings per common share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Potential common shares that may be issued by the Company relate to shares subscribed but not yet issued in 2017 and 2016 under the Employee Stock Purchase Plan, and are reported as dilutive options. No shares were subscribed but not issued at the end of the six months ended June 30, 2017 and 2016.

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

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

	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities Available-for-Sale
U.S. government agency and sponsored enterprise (GSE) debt securities	$	112,611	$	1	$	(685	)	$	111,927
U.S. government agency pool securities		251,683		61		(1,458	)		250,286
U.S. government agency or GSE residential mortgage-backed securities		79,179		32		(539	)		78,672
Total	$	443,473	$	94	$	(2,682	)	$	440,885
Securities Held-to-Maturity
U.S. government agency and sponsored enterprise (GSE) debt securities	$	45,044	$	939	$	(45	)	$	45,938
U.S. government agency pool securities		12,784		37		(25	)		12,796
U.S. government agency or GSE residential mortgage-backed securities		35,094		461		(236	)		35,319
Total	$	92,922	$	1,437	$	(306	)	$	94,053

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities Available-for-Sale
U.S. government agency and sponsored enterprise (GSE) debt securities	$	125,476	$	6	$	(1,051	)	$	124,431
U.S. government agency pool securities		238,615		124		(1,613	)		237,126
U.S. government agency or GSE residential mortgage-backed securities		59,049		36		(762	)		58,323
Total	$	423,140	$	166	$	(3,426	)	$	419,880
Securities Held-to-Maturity
U.S. government agency and sponsored enterprise (GSE) debt securities	$	44,909	$	956	$	(36	)	$	45,829
U.S. government agency pool securities		13,591		14		(91	)		13,514
U.S. government agency or GSE residential mortgage-backed securities		37,667		373		(320	)		37,720
Total	$	96,167	$	1,343	$	(447	)	$	97,063

At June 30, 2017, and December 31, 2016, investment securities with a carrying value of $364.7 million and $319.5 million, respectively, were pledged to secure various government deposits and to meet other public requirements.

Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended June 31, 2017 and 2016, are shown below:

The amortized cost and estimated fair value of investment securities by contractual maturity at June 30, 2017, and December 31, 2016, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or borrowers the right to prepay obligations with or without call or prepayment penalties. At June 30, 2017, obligations of U.S. government corporations and agencies with amortized costs totaling $536.4 million consist predominantly of Small Business Administration agency pool securities totaling $264.5 million and residential mortgage-backed securities totaling $114.3 million whose contractual maturity, or principal repayment, will follow the repayment of the underlying small business loans or mortgages. For purposes of the following table, the entire outstanding balance of these SBA Pools and mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At June 30, 2017, the Bank estimates the average remaining life of these SBA Pools and mortgage-backed securities to be approximately 5.32 years and 3.95 years, respectively.

	June 30, 2017
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	201	$	202	$	2,494	$	2,487
Due after one but within five years		116,564		115,850		58,437		59,699
Due after five but within ten years		47,444		47,226		20,213		20,268
Due after ten years		279,264		277,607		11,778		11,599
Total	$	443,473	$	440,885	$	92,922	$	94,053

	December 31, 2016
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	-	$	-	$	-	$	-
Due after one but within five years		131,023		129,943		57,761		58,831
Due after five but within ten years		44,787		44,627		14,427		14,609
Due after ten years		247,330		245,310		23,979		23,623
Total	$	423,140	$	419,880	$	96,167	$	97,063

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2017, and December 31, 2016.

	June 30, 2017
	Less Than Twelve Months					More Than Twelve Months					Total
	Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value
Securities Available for Sale
U.S. government agency and government sponsored enterprise (GSE) debt securities	$	(685	)	$	106,934	$	-		$	-	$	(685	)	$	106,934
U.S. government agency pool securities		(609	)		146,739		(849	)		78,599		(1,458	)		225,338
U.S. government agency or GSE mortgage-backed securities		(436	)		48,046		(103	)		14,113		(539	)		62,159
Total	$	(1,730	)	$	301,719	$	(952	)	$	92,712	$	(2,682	)	$	394,431

Securities Held to Maturity
U.S. government agency and GSE debt securities	$	(45	)	$	16,029	$	-		$	-	$	(45	)	$	16,029
U.S. government agency pool securities		-			782		(25	)		3,512		(25	)		4,294
U.S. government agency or GSE mortgage-backed securities		(236	)		16,540		-			-		(236	)		16,540
Total	$	(281	)	$	33,351	$	(25	)	$	3,512	$	(306	)	$	36,863

	December 31, 2016
	Less Than Twelve Months					More Than Twelve Months					Total
	Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value
Securities Available for Sale
U.S. government agency and government sponsored enterprise (GSE) debt securities	$	(1,051	)	$	116,516	$	-		$	-	$	(1,051	)	$	116,516
U.S. government agency pool securities		(597	)		174,370		(1,016	)		34,222		(1,613	)		208,592
U.S. government agency or GSE mortgage-backed securities		(693	)		42,997		(69	)		9,225		(762	)		52,222
Total	$	(2,341	)	$	333,883	$	(1,085	)	$	43,447	$	(3,426	)	$	377,330

Securities Held to Maturity
U.S. government agency and GSE debt securities	$	(36	)	$	16,052	$	-		$	-	$	(36	)	$	16,052
U.S. government agency pool securities		(9	)		2,748		(82	)		10,144		(91	)		12,892
U.S. government agency or GSE mortgage-backed securities		(320	)		16,990		-			-		(320	)		16,990
Total	$	(365	)	$	35,790	$	(82	)	$	10,144	$	(447	)	$	45,934

The investment securities that were in an unrealized loss position as of June 30, 2017, which comprised a total of 144 securities, were not other-than-temporarily impaired. Specifically, the 144 securities are comprised of the following: 83 Small Business Administration (SBA) Pool securities, 21 mortgage-backed securities issued by the Government National Mortgage Association (GNMA), 9 mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and 7 agency securities issued by the Federal Home Loan Bank (FHLB), 2 mortgage-backed securities and 3 step up bonds issued by Federal Home Loan Mortgage Corporation (FHLMC), 1 agency security issued by Federal Farm Credit Banks (FFCB), and 18 U.S. Treasuries.

Total gross unrealized losses were primarily attributable to changes in market interest rates, relative to when the investment securities were purchased, and not due to any change in the credit quality of the investment securities. In addition, these securities and their repayment are sponsored by the U.S. Government or its various agencies and therefore, it is unlikely that they will ever be settled for less than par. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not likely that the Company will be required to sell the investment securities before recovery of their amortized cost, which may be at maturity.

In May 2016, the Company entered into a Stock Purchase Agreement to acquire 25% of ASC Trust Corporation, a Guam trust company. In July 2016, subsequent to the approval of the Federal Reserve Bank of San Francisco in June 2016, the purchase was executed. The Agreement provides for the acquisition of an additional 20% of the stock of ASC Trust Corporation in April 2019, and another 25% in April 2021, with both future purchases subject to regulatory approval. The Agreement contains customary warranties, representations and indemnification provisions. The ASC Trust Corporation stock is subject to the equity method of accounting in our Statements of Condition. During the six months ended June 30, 2017, the Company’s recorded investment in ASC Trust increased by $63 thousand, based upon the earnings of ASC that are attributed to the Company’s ownership, less of the amount of dividends received during the first six months of the year.

In its normal course of business, the Bank originates mortgage loans held for sale to the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). The Bank has elected to measure its residential mortgage loans held for sale at cost. Origination fees and costs are recognized in earnings at the time of origination. Loans are sold to Freddie Mac at par.

During the six months ended June 30, 2017 and 2016, the Bank originated and sold approximately $8.5 million and $8.9 million, respectively, in FHLMC mortgage loans.

Mortgage loans serviced for others are not included in the accompanying condensed consolidated statements of condition. The unpaid principal balances of mortgage loans serviced for others were $206.4 million and $211.0 million at June 30, 2017, and December 31, 2016, respectively. The decrease of $4.6 million (2.2 %) during the first half of 2017 was due to scheduled principal payments and prepayments.

We retain mortgage servicing rights on mortgage loans that we sell. Such rights represent the net positive cash flows generated from the servicing of such mortgage loans and we recognize such rights as assets on our statements of financial condition based on their estimated fair values. We receive servicing fees, less any subservicing costs, on the unpaid principal balances of such mortgage loans. Those fees are collected from the monthly payments made by the mortgagors or from the proceeds of the sale or foreclosure and liquidation of the underlying real property collateralizing the loans. At June 30, 2017, and December 31, 2016, mortgage servicing rights totaled $1.5 million and $1.5 million, respectively, and are included in other assets in the accompanying consolidated statements of condition. The Bank accounts for mortgage servicing rights at fair value with changes in fair value recorded in the condensed consolidated statements of income, subject to annual updates in our prepayment speed assumptions.

Outstanding loan balances are presented net of unearned income, deferred loan fees, and unamortized discount and premium. Loans subject to ASC 310-30 are presented net of the related accretable yield.

	June 30, 2017						December 31, 2016
	Amount			Percent			Amount			Percent
Commercial
Commercial & industrial	$	225,575			19.4	%	$	248,059			21.1	%
Commercial mortgage		536,034			46.1	%		552,272			47.0	%
Commercial construction		15,185			1.3	%		6,421			0.5	%
Commercial agriculture		731			0.1	%		747			0.1	%
Total commercial		777,525			66.9	%		807,499			68.7	%
Consumer
Residential mortgage		139,755			12.0	%		143,951			12.2	%
Home equity		474			0.0	%		480			0.0	%
Automobile		30,993			2.7	%		30,798			2.6	%
Other consumer loans¹		213,916			18.4	%		193,279			16.4	%
Total consumer		385,138			33.1	%		368,508			31.3	%
Gross loans		1,162,663			100.0	%		1,176,007			100.0	%
Deferred fee (income) costs, net		(2,786	)					(2,527	)
Allowance for loan losses		(15,371	)					(15,435	)
Loans, net	$	1,144,506					$	1,158,045

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

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. ASC 310-10 defines an impaired loan as one for which there is uncertainty concerning collection of all principal and interest balances per the original contractual terms of the loan. For those loans that are classified as impaired, an allowance is established when the discounted cash flow (or the collateral value or the observable market price) of the impaired loan is lower than the carrying value of the loan. The general component covers unimpaired loans, and is estimated using a loss migration analysis based on historical charge-off experience and expected loss, given the default probability derived from the Bank’s internal risk rating process. The loss migration analysis tracks twelve rolling quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans. These calculated loss factors are then applied to outstanding loan balances for all non-impaired loans. Additionally, a qualitative factor that is determined utilizing external economic factors and internal assessments is applied to each homogeneous loan pool. We also conduct individual loan review analyses, as part of the allowance for loan loss allocation process, applying specific monitoring policies and procedures in analyzing the existing loan portfolio.

Set forth below is a summary of the Bank’s activity in the allowance for loan losses during the three and six months ended June 30, 2017 and 2016, and the year ended December 31, 2016:

Set forth below is information regarding loan balances and the related allowance for loan losses, by portfolio type, for the three and six months ended June 30, 2017 and 2016, and the year ended December 31, 2016, respectively.

	Commercial			Residential Mortgages			Consumer			Total
	(Dollars in thousands)
Six Months Ended June 30, 2017
Allowance for loan losses:
Balance at beginning of period	$	8,599		$	1,878		$	4,958		$	15,435
Charge-offs		-			(30	)		(3,198	)	$	(3,228	)
Recoveries		30			3			764		$	797
Provision		200			6			2,161		$	2,367
Balance at end of period	$	8,829		$	1,857		$	4,685		$	15,371

Three Months Ended June 30, 2017
Allowance for loan losses:
Balance at beginning of period	$	8,685		$	1,879		$	4,771		$	15,335
Charge-offs		-			(29	)		(1,579	)	$	(1,608	)
Recoveries		20			1			439		$	460
Provision		124			6			1,054		$	1,184
Balance at end of period	$	8,829		$	1,857		$	4,685		$	15,371

Allowance balance at end of period related to:
Loans individually evaluated for impairment	$	-		$	-		$	-		$	-
Loans collectively evaluated for impairment	$	8,829		$	1,857		$	4,685		$	15,371

Loan balances at end of period:
Loans individually evaluated for impairment	$	6,557		$	6,181		$	138		$	12,876
Loans collectively evaluated for impairment		770,968			134,048			244,771			1,149,787
Ending Balance	$	777,525		$	140,229		$	244,909		$	1,162,663

Six Months Ended June 30, 2016
Allowance for loan losses:
Balance at beginning of period	$	6,890		$	1,853		$	5,416		$	14,159
Charge-offs		(206	)		(91	)		(2,537	)	$	(2,834	)
Recoveries		1,655			3			636		$	2,294
Provision		82			245			2,003		$	2,330
Balance at end of period	$	8,421		$	2,010		$	5,518		$	15,949

Three Months Ended June 30, 2016
Allowance for loan losses:
Balance at beginning of period	$	6,637		$	1,965		$	5,521		$	14,123
Charge-offs		-			(20	)		(1,354	)	$	(1,374	)
Recoveries		1,661			2			352		$	2,015
Provision		123			63			999		$	1,185
Balance at end of period	$	8,421		$	2,010		$	5,518		$	15,949

Allowance balance at end of period related to:
Loans individually evaluated for impairment	$	-		$	-		$	-		$	-
Loans collectively evaluated for impairment	$	8,421		$	2,010		$	5,518		$	15,949

Loan balances at end of period:
Loans individually evaluated for impairment	$	8,595		$	7,199		$	145		$	15,939
Loans collectively evaluated for impairment		792,189			137,857			214,950			1,144,996
Ending Balance	$	800,784		$	145,056		$	215,095		$	1,160,935

Year Ended December 31, 2016
Allowance for loan losses:

Balance at beginning of year	$	6,890		$	1,853		$	5,416		$	14,159
Charge-offs		(276	)		(121	)		(5,234	)		(5,631	)
Recoveries		1,691			6			1,310			3,007
Provision		294			140			3,466			3,900
Balance at end of year	$	8,599		$	1,878		$	4,958		$	15,435

Allowance balance at end of year related to:
Loans individually evaluated for impairment	$	-		$	-		$	-		$	-
Loans collectively evaluated for impairment	$	8,599		$	1,878		$	4,958		$	15,435

Loan balances at end of year:
Loans individually evaluated for impairment	$	7,749		$	6,388		$	174		$	14,311
Loans collectively evaluated for impairment		799,750			138,043			223,903			1,161,696
Ending Balance	$	807,499		$	144,431		$	224,077		$	1,176,007

Impairment is measured on a loan-by-loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral (if the loan is collateral-dependent). Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. The Bank performs direct write-downs of all impaired loans with a charge to the allocated component of the allowance, therefore reducing the allocated component of the allowance to zero at the end of each reporting period.

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

	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater		Total Past Due		Current		Total Loans Outstanding
June 30, 2017
Commercial
Commercial & industrial	$	712	$	347	$	199	$	1,258	$	224,317	$	225,575
Commercial mortgage		213		718		571		1,502		534,532		536,034
Commercial construction		-		-		-		-		15,185		15,185
Commercial agriculture		-		-		-		-		731		731
Total commercial		925		1,065		770		2,760		774,765		777,525

Consumer
Residential mortgage		4,103		4,539		2,359		11,001		128,754		139,755
Home equity		99		9		-		108		366		474
Automobile		1,283		289		70		1,642		29,351		30,993
Other consumer ¹		2,920		1,540		1,271		5,731		208,185		213,916
Total consumer		8,405		6,377		3,700		18,482		366,656		385,138
Total	$	9,330	$	7,442	$	4,470	$	21,242	$	1,141,421	$	1,162,663

December 31, 2016
Commercial
Commercial & industrial	$	610	$	269	$	119	$	998	$	247,061	$	248,059
Commercial mortgage		-		770		691		1,461		550,811		552,272
Commercial construction		-		-		-		-		6,421		6,421
Commercial agriculture		-		-		-		-		747		747
Total commercial		610		1,039		810		2,459		805,040		807,499

Consumer
Residential mortgage		6,277		3,457		3,211		12,945		131,006		143,951
Home equity		-		102		-		102		378		480
Automobile		1,288		239		104		1,631		29,167		30,798
Other consumer ¹		2,521		1,149		1,771		5,441		187,838		193,279
Total consumer		10,086		4,947		5,086		20,119		348,389		368,508
Total	$	10,696	$	5,986	$	5,896	$	22,578	$	1,153,429	$	1,176,007

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

The following table provides information as of June 30, 2017, and December 31, 2016, with respect to loans on non-accrual status, by portfolio type:

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

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

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

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

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

Special Mention: A Special Mention asset has potential weaknesses that deserve a heightened degree of monitoring. These potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The Special Mention classification

should neither be a compromise between a pass grade and substandard, nor should it be a “catch all” grade to identify any loan that has a policy exception.

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

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

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

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

The Bank classifies its loan portfolios using internal credit quality ratings, as discussed above under Allowance for Loan Losses. The following table provides a summary of loans by portfolio type and the Bank’s internal credit quality ratings as of June 30, 2017, and December 31, 2016:

	June 30, 2017		December 31, 2016		Increase (Decrease)
	(Dollars in thousands)
Pass:
Commercial & industrial	$	212,492	$	231,553	$	(19,061	)
Commercial mortgage		498,725		538,471		(39,746	)
Commercial construction		15,185		6,422		8,763
Commercial agriculture		731		747		(16	)
Residential mortgage		133,338		137,446		(4,108	)
Home equity		474		445		29
Automobile		30,923		30,714		209
Other consumer		212,596		191,467		21,129
Total pass loans	$	1,104,464	$	1,137,265	$	(32,801	)

Special Mention:
Commercial & industrial	$	8,196	$	14,710	$	(6,514	)
Commercial mortgage		30,153		6,055		24,098
Commercial construction		-		-		-
Commercial agriculture		-		-		-
Residential mortgage		147		152		(5	)
Home equity		-		-		-
Automobile		-		-		-
Other consumer		-		-		-
Total special mention loans	$	38,496	$	20,917	$	17,579

Substandard:
Commercial & industrial	$	4,794	$	1,790	$	3,004
Commercial mortgage		6,943		7,521		(578	)
Commercial construction		-		-		-
Commercial agriculture		-		-		-
Residential mortgage		639		431		208
Home equity		-		-		-
Automobile		-		-		-
Other consumer		-		-		-
Total substandard loans	$	12,376	$	9,742	$	2,634

Formula Classified:
Commercial & industrial	$	93	$	6	$	87
Commercial mortgage		213		224		(11	)
Commercial construction		-		-		-
Commercial agriculture		-		-		-
Residential mortgage		5,631		5,922		(291	)
Home equity		-		35		(35	)
Automobile		70		84		(14	)
Other consumer		1,320		1,812		(492	)
Total formula classified loans	$	7,327	$	8,083	$	(756	)

Doubtful:
Commercial & industrial	$	-	$	-	$	-
Commercial mortgage		-		-		-
Commercial construction		-		-		-
Commercial agriculture		-		-		-
Residential mortgage		-		-		-
Home equity		-		-		-
Automobile		-		-		-
Other consumer		-		-		-
Total doubtful loans	$	-	$	-	$	-
Total outstanding loans, gross	$	1,162,663	$	1,176,007	$	(13,344	)

As the above table indicates, the Bank’s total gross loans approximated $1.16 billion at June 30, 2017, down from $1.18 billion at December 31, 2016. The disaggregation of the portfolio by risk rating in the table reflects the following changes between December 31, 2016, and June 30, 2017:

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

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

The following table sets forth information regarding non-accrual loans and restructured loans, at June 30, 2017, and December 31, 2016:

The table below contains additional information with respect to impaired loans, by portfolio type, at June 30, 2017, and December 31, 2016:

	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
June 30, 2017, With no related allowance recorded:
Commercial & industrial	$	496	$	665	$	910	$	-
Commercial mortgage		6,061		6,264		6,276		-
Commercial construction		-		-		-		-
Commercial agriculture		-		-		-		-
Residential mortgage		6,181		6,232		6,353		(1	)
Home equity		-		-		-		-
Automobile		-		-		-		-
Other consumer		138		138		141		-
Total impaired loans with no related allowance	$	12,876	$	13,299	$	13,680	$	(1	)

June 30, 2017, With a related allowance recorded:
Commercial & industrial	$	-	$	-	$	-	$	-
Commercial mortgage		-		-		-		-
Commercial construction		-		-		-		-
Commercial agriculture		-		-		-		-
Residential mortgage		-		-		-		-
Home equity		-		-		-		-
Automobile		-		-		-		-
Other consumer		-		-		-		-
Total impaired loans with no related allowance	$	-	$	-	$	-	$	-

December 31, 2016, With no related allowance recorded:
Commercial & industrial	$	1,359	$	2,993	$	1,497	$	-
Commercial mortgage		6,390		6,629		7,710		-
Commercial construction		-		-		-		-
Commercial agriculture		-		-		-		-
Residential mortgage		6,353		6,375		6,896		2
Home equity		35		35		36		-
Automobile		-		-		-		-
Other consumer		174		175		142		-
Total impaired loans with no related allowance	$	14,311	$	16,207	$	16,281	$	2

December 31, 2016, With a related allowance recorded:
Commercial & industrial	$	-	$	-	$	-	$	-
Commercial mortgage		-		-		-		-
Commercial construction		-		-		-		-
Commercial agriculture		-		-		-		-
Residential mortgage		-		-		-		-
Home equity		-		-		-		-
Automobile		-		-		-		-
Other consumer		-		-		-		-
Total impaired loans with no related allowance	$	-	$	-	$	-	$	-

Impairment is measured on a loan-by-loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral (if the loan is collateral-dependent). Large groups of smaller-balance, homogeneous loans are collectively evaluated for impairment. The Bank performs direct write-downs of impaired loans with a charge to the allocated component of the allowance for loan losses, thereby reducing the allocated component of the allowance to zero at the end of each reporting period.

The Bank had $5.7 million of troubled debt restructurings (TDRs) as of June 30, 2017, down by $1.2 million from $6.9 million at December 31, 2016, and entirely in commercial mortgage loans. The restructured loans recorded with the Bank have been modified for the purpose of alleviating temporary impairments to the borrower’s financial condition. The modifications that the Bank has extended to borrowers have come in the form of a change in the amortization terms, a reduction in the interest rate, and interest-only payments. The workout plan between the borrower and the Bank is designed to provide a bridge for cash flow shortfalls in the near term. As the borrower works through the near-term issues, in most cases, the original contractual terms will be reinstated.

Additional information regarding performing and nonperforming TDRs at June 30, 2017, and December 31, 2016, is set forth in the following table:

			Pre-Modification Outstanding				Post-Modification Outstanding		Outstanding Balance
	Number of Loans		Recorded Investment		Principal Modifications		Recorded Investment		June 30, 2017		December 31, 2016
Performing
Residential mortgage		-	$	-	$	-	$	-	$	-	$	-
Commercial mortgage		1		270		-		270		235		265
Automobile		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total Performing		1	$	270	$	-	$	270	$	235	$	265
Nonperforming
Residential mortgage		-	$	-	$	-	$	-	$	-	$	-
Commercial mortgage		8		7,939		-		7,939		5,459		6,589
Automobile		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total Nonperforming		8	$	7,939	$	-	$	7,939	$	5,459	$	6,589
Total Troubled Debt Restructurings (TDRs)		9	$	8,209	$	-	$	8,209	$	5,694	$	6,854

Principal Modification includes principal forgiveness at the time of modification, contingent principal forgiveness granted over the life of the loan based on borrower performance, and principal that has been legally separated and deferred to the end of the loan, with zero percent contractual interest rate.

During the six-month periods ended June 30, 2017 and 2016, no loans were modified as troubled debt restructurings.

There were no defaults on troubled debt restructurings within twelve months following the modification, nor were there any charge-offs or impacts to ALLL from loans identified as trouble debt restructurings during the six months ended June 30, 2017 and 2016.

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

The Bank is subject to various regulatory capital requirements administered by the United States federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s, BGIIS’s and the Company’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 their assets, liabilities and certain off-balance-sheet items, as calculated under regulatory accounting practices.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). As of June 30, 2017, and December 31, 2016, the Bank met all capital adequacy requirements to which it is subject.

In December 2010, the Basel Committee on Bank Supervision (“Basel Committee”) released its final framework for strengthening international capital and liquidity regulation, now officially identified as “Basel III,” which, when fully phased-in, would require bank holding companies and their bank subsidiaries to maintain substantially more capital than had previously been required, with a greater emphasis on common equity.

In July 2013, the U.S. banking regulatory agencies approved the U.S. version of Basel III. The agencies-adopted version of Basel III revises the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to make them consistent with Basel III and to meet the requirements of the Dodd-Frank Act. Although many of the rules contained in these final regulations are applicable only to large, internationally active banks, some of them apply on a phased-in basis to all banking organizations, including the Company and the Bank. Among other things, the rules establish a new minimum common equity Tier 1 ratio (4.5% of risk-weighted assets), a higher minimum Tier 1 risk-based capital requirement (6.0% of risk-weighted assets) and a minimum non-risk-based leverage ratio (4.00%, eliminating a 3.00% exception for higher rated banks). The new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 (1.25% in 2017 and 0.625% in 2016) and must be met to avoid limitations on the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses. An additional “countercyclical capital buffer” is required for larger and more complex institutions. The new rules assign higher risk weighting to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also change the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets, and include unrealized gains and losses on available-for-sale debt and equity securities (through a one-time opt out option for Standardized Banks (banks with less than $250 billion of total consolidated assets and less than $10 billion of foreign exposures) which the Company and the Bank elected at March 31, 2015). The rules, including alternative requirements for smaller community financial institutions like the Company and the Bank, will be phased in through 2019.

As of June 30, 2017, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized 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. The Bank’s actual capital amounts and ratios as of June 30, 2017, and December 31, 2016, are also presented in the table below.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
At June 30, 2017:
Total capital (to Risk Weighted Assets)	$	148,497		13.020	%	$	105,501		9.250	%	$	114,055		10.000	%
Tier 1 capital (to Risk Weighted Assets)	$	134,226		11.769	%	$	82,690		7.250	%	$	91,244		8.000	%
Tier 1 capital (to Average Assets)	$	134,226		6.878	%	$	90,252		4.625	%	$	97,569		5.000	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	129,226		11.330	%	$	65,582		5.750	%	$	74,136		6.500	%

At December 31, 2016:
Total capital (to Risk Weighted Assets)	$	144,827		12.610	%	$	99,023		8.625	%	$	114,809		10.000	%
Tier 1 capital (to Risk Weighted Assets)	$	130,463		11.360	%	$	76,061		6.625	%	$	91,847		8.000	%
Tier 1 capital (to Average Assets)	$	130,463		7.060	%	$	73,937		4.000	%	$	92,421		5.000	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	125,463		10.930	%	$	58,839		5.125	%	$	74,626		6.500	%

In addition, the Company’s actual capital amounts and ratios as of June 30, 2017, and December 31, 2016, are also presented in the table below.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
At June 30, 2017
Total capital (to Risk Weighted Assets)	$	153,472		13.420	%	$	105,793		9.250	%	$	114,370		10.000	%
Tier 1 capital (to Risk Weighted Assets)	$	139,162		12.170	%	$	82,918		7.250	%	$	91,496		8.000	%
Tier 1 capital (to Average Assets)	$	138,873		7.110	%	$	90,394		4.625	%	$	97,723		5.000	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	129,380		11.310	%	$	65,763		5.750	%	$	74,341		6.500	%

At December 31, 2016
Total capital (to Risk Weighted Assets)	$	149,540		12.990	%	$	106,483		9.250	%	$	115,117		10.000	%
Tier 1 capital (to Risk Weighted Assets)	$	135,138		11.739	%	$	83,460		7.250	%	$	92,093		8.000	%
Tier 1 capital (to Average Assets)	$	135,138		7.299	%	$	85,633		4.625	%	$	92,576		5.000	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	125,355		10.889	%	$	66,192		5.750	%	$	74,826		6.500	%

Under the Bank’s 2011 Employee Stock Purchase Plan, eligible employees can purchase, through payroll deductions, shares of common stock at a discount. The right to purchase stocks is granted to eligible employees during a quarterly offer period that is established from time to time by the Board of Directors of the Company. Eligible employees cannot accrue the right to purchase more than $25 thousand worth of stock at the fair market value at the beginning of each offer period. Eligible employees also may not purchase more than one thousand five hundred (1,500) shares of stock in any one offer period. The shares are purchased at 85% of the fair market price of the stock on the enrollment date. Proceeds from the issuance of common stock under this Plan were $99 thousand during the first six months of 2017, compared to proceeds of $88 thousand during the year-earlier period.

Commencing September 15, 2016, the Company offered a private placement of securities for the issuance and sale of an aggregate of 10,000 shares of its new, non-voting Series A Non-Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”). These securities were offered to various accredited and a limited number of non-accredited investors for total proceeds of up to $10 million (the “Offering”). Each subscriber could purchase a minimum number of Series A Preferred Stock equivalent to at least $250,000 (250 shares). This offering carried a subscription price of $1 thousand per share and an initial fixed yield of 5.5% per annum, but the yield becomes floating at June 30, 2021, after which the annual yield will be the three-month LIBOR rate plus 4.825%. The Series A Preferred Stock carries a liquidation preference of $1 thousand per share. The Offering agreement contains customary warranties, representations and indemnification provisions, and expired on December 31, 2016. At June 30, 2017, 9,783 of these shares were issued and outstanding.

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

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

A summary of financial instruments with off-balance-sheet risk at June 30, 2017, and December 31, 2016, is as follows:

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for some lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer.

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

The Bank considers its standby and other letters of credit to be payment guarantees. At June 30, 2017, the maximum undiscounted future payments that the Bank could be required to make for all outstanding letters of credit were $52.4 million. All of these arrangements mature within one year. The Bank has recourse to recover from the customer any amounts paid under these guarantees. Most of the guarantees are fully collateralized; however, several are unsecured. The Bank had recorded $21.0 thousand and $18.0 thousand in reserve liabilities associated with these guarantees at June 30, 2017, and December 31, 2016, respectively.

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

A valuation allowance of $3.2 million has been provided at June 30, 2017, and December 31, 2016, to reduce the deferred tax asset because, in management’s opinion, it is more likely than not that less than the entire amount will be realized. The portion of the deferred tax asset with valuation allowance is attributable to a cumulative net operating loss carry forward from the Bank’s CNMI operations, which losses management anticipates will continue. The charge from the net operating loss has already been realized in the accompanying statements of income as a result of the Guam income tax code.

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

In addition to filing a federal income tax return in Guam, the Bank files income tax returns in the CNMI and the State of California. The Bank is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2010.

The Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with ASC Topic 820 “Fair Value Measurements and Disclosures”, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance of ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale)

between market participants at the measurement date under then-current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under then-current market conditions depends on the facts and circumstances, and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under then-current market conditions.

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

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

Financial assets measured at fair value on a recurring basis as of June 30, 2017, and December 31, 2016, are as follows:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
At June 30, 2017
U.S. treasury notes and bonds	$	59,573	$	-	$	-	$	59,573
U.S. government agency and sponsored enterprise (GSE) debt securities		-		52,354		-		52,354
U.S. government agency pool securities		-		250,286		-		250,286
U.S. government agency or GSE		-		78,672		-		78,672
Other assets:
MSRs		-		-		1,515		1,515
Total fair value	$	59,573	$	381,312	$	1,515	$	442,400

At December 31, 2016
U.S. treasury notes and bonds	$	72,378	$	-	$	-	$	72,378
U.S. government agency and sponsored enterprise (GSE) debt securities		-		52,053		-		52,053
U.S. government agency pool securities		-		237,126		-		237,126
U.S. government agency or GSE		-		58,323		-		58,323
Other assets:
MSRs		-		-		1,527		1,527
Total fair value	$	72,378	$	347,502	$	1,527	$	421,407

There were no liabilities measured at fair value on a recurring basis as of June 30, 2017, and December 31, 2016.

During the six months ended June 30, 2017 and 2016, the changes in Level 3 assets measured at fair value on a recurring basis are as follows:

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

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

There were no transfers into or out of the Bank’s Level 3 financial instruments for the periods ended June 30, 2017, and December 31, 2016.

Under certain circumstances, the Bank makes adjustments to fair value for assets and liabilities even though they are not measured at fair value on an ongoing basis. The following table presents the financial instruments carried on the consolidated statements of condition by caption and by level in the fair value hierarchy at June 30, 2017, and December 31, 2016, for which a nonrecurring change in fair value has been recorded:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
June 30, 2017
Financial assets:
Loans, net
Impaired loans	$	-	$	-	$	-	$	-

Other assets
Other real estate owned	$	-	$	-	$	2,582	$	2,582

December 31, 2016
Financial assets:
Loans, net
Impaired loans	$	-	$	-	$	-	$	-

Other assets
Other real estate owned	$	-	$	-	$	2,746	$	2,746

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

Additionally, the Bank also makes adjustments to nonfinancial assets and liabilities even though they are not measured at fair value on an ongoing basis. With the exception of other real estate owned, the Bank does not have nonfinancial assets or liabilities for which a nonrecurring change in fair value has been recorded during the periods ended June 30, 2017, and December 31, 2016.

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

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

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

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

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

If quoted market prices are not available, the Bank estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. GSE obligations, U.S. government agency pool securities, and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Bank would classify those securities in Level 3. At June 30, 2017, and December 31, 2016, the Bank did not have any Level 3 investment securities.

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

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

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

The carrying amounts of federal funds purchased and Federal Home Loan Bank (FHLB) advances maturing within ninety days approximate their fair values.

The fair value of FHLB advances maturing after ninety days is determined based on expected present value techniques using current market interest rates for advances with similar terms and remaining maturities.

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

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

			Estimated fair value
	Carrying Amount		Level 1		Level 2		Level 3
June 30, 2017	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	211,686	$	211,686	$	-	$	-
Restricted cash		400		400		-		-
Federal Home Loan Bank stock		2,303	N/A		N/A		N/A
Investment securities held-to-maturity		92,922		-		94,053		-
Loans, net		1,144,506		-		-		1,136,989
Total	$	1,451,817	$	212,086	$	94,053	$	1,136,989

Financial liabilities:
Deposits		1,819,163		-		-		1,811,887
Total	$	1,819,163	$	-	$	-	$	1,811,887

December 31, 2016	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	176,651	$	176,651	$	-	$	-
Restricted cash		400		400		-		-
Federal Home Loan Bank stock		1,855	N/A		N/A		N/A
Investment securities held-to-maturity		96,167		-		97,063		-
Loans, net		1,158,045		-		-		1,149,937
Total	$	1,433,118	$	177,051	$	97,063	$	1,149,937

Financial liabilities:
Deposits	$	1,778,670	$	-	$	-	$	1,767,345
Total	$	1,778,670	$	-	$	-	$	1,767,345

The components of accumulated other comprehensive income, including stockholders’ equity, are as follows:

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

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of the Company and its wholly-owned subsidiaries, the Bank and BGIIS. 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.

BankGuam Holding Company (the “Company”) is a Guam corporation organized on October 29, 2010, to act as a holding company of Bank of Guam (the “Bank”), a 23-branch bank serving the communities in Guam, the Commonwealth of the Northern Mariana Islands (CNMI), the Federated States of Micronesia (FSM), the Republic of the Marshall Islands (RMI), the Republic of Palau (ROP), and San Francisco, California. On August 15, 2011, the Company acquired all of the outstanding common stock of the Bank in a holding company formation transaction.

In August 2015, the Company chartered a second subsidiary, BankGuam Investment and Insurance Services (“BGIIS”), in an effort to enhance the options and opportunities of our customers to build future income and wealth. BGIIS was capitalized in the amount of $300 thousand during the first quarter of 2016, and was in full operation by the end of May 2016.

Other than holding the shares of the Bank, BGIIS and ASC Trust Corporation, the Company conducts no significant activities, although it is authorized, with the prior approval of its principal regulator, the Board of Governors of the Federal Reserve System, to engage in a variety of activities related to the business of banking. Currently, substantially all of the Company’s operations are conducted and substantially all of its assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses and operating income. The Bank’s headquarters is located in Hagåtña, Guam, and the Bank provides a variety of financial services to individuals, businesses and government entities through its branch network. The Bank’s primary deposit products are demand deposits, savings and time certificates of deposit, and its primary lending products are consumer, commercial and real estate loans. The Bank also provides many other financial services to its customers. BGIIS is a registered investment company, primarily involved in providing investment advisory services and trading securities for its customers. ASC Trust Corporation is primarily involved in administering 401(k) retirement plans and other employee benefit programs for its customers.

The following table provides unaudited comparative information with respect to our results of operations for the three and six months ended June 30, 2017 and 2016, respectively:

	Three Months Ended June 30,							Six Months Ended June 30,
	2017 Amount		2016 Amount		% Change			2017 Amount		2016 Amount		% Change
Interest income	$	20,268	$	19,469		4.1	%	$	39,355	$	37,405		5.2	%
Interest expense		552		511		8.0	%		1,082		975		11.0	%
Net interest income before provision for loan losses		19,716		18,958		4.0	%		38,273		36,430		5.1	%
Provision for loan losses		1,184		1,185		-0.1	%		2,367		2,330		1.6	%
Net interest income after provision for loan losses		18,532		17,773		4.3	%		35,906		34,100		5.3	%
Non-interest income		3,178		3,520		-9.7	%		6,217		6,381		-2.6	%
Non-interest expense		17,257		16,460		4.8	%		34,412		31,621		8.8	%
Income before income taxes		4,453		4,833		-7.9	%		7,711		8,860		-13.0	%
Income tax expense		1,184		1,427		-17.0	%		2,157		2,536		-14.9	%
Net income	$	3,269	$	3,406		-4.0	%	$	5,554	$	6,324		-12.2	%

Net income per common share
Basic net income	$	0.35	$	0.37				$	0.60	$	0.68
Diluted net income	$	0.35	$	0.37				$	0.60	$	0.68

As the above table indicates, our net income decreased in the three months ended June 30, 2017, as compared to the corresponding period in 2016. In the three months ended June 30, 2017, we recorded net income after taxes of $3.3 million, aa decrease of $137 thousand (or 4.0%) as compared to the same period in 2016. These results were most significantly impacted by higher non-interest expense, which increased by $797 thousand and lower non-interest income, which fell by $342 thousand, but were largely offset by an increase of $758 thousand in net interest income and $243 thousand less in income tax expense. The increase in non-interest expense in the three months ended June 30, 2017, as compared to the same period in 2016, was largely attributed to an increase in salaries and employee benefits expenses, which went up by $473 thousand, and an increase of $316 thousand in equipment and depreciation expenses. The increase in net interest income was due to an increase in total interest income of $799 thousand, generated primarily by an increase of $692 thousand in earnings from our investment portfolio and an increase of $144 thousand in our earnings from our deposits with other banks, including the Federal Reserve Bank of San Francisco, only partially offset by the increase in total interest expense by $41 thousand that resulted from the increase of $204.3 million in our average interest-bearing liabilities. The decrease in income tax expense was due to the reduction of $380 thousand in pre-tax income.

During the six months ended June 30, 2017, our net income after taxes decreased by $770 thousand (12.2%) in comparison to the first six months of 2016, primarily due to an increase of $2.8 million in non-interest expense, only partially offset by an increase of $1.8 million in net interest income and a decrease of $379 thousand in income tax expense. The rise in non-interest expense was due to an increase of the $1.4 million in salaries and employee benefits that resulted primarily from annual merit increases, an increase of $630 thousand in equipment and depreciation expense, and higher general, administrative and other expense, which rose by $527 thousand, partly offset by a reduction of $227 thousand in professional service expense. The decrease in income tax expense was due to our lower income before income taxes, while the increase in net interest income was the result of the growth of $33.6 million in our interest-earning assets, attenuated by a decrease of 0.42% in our net interest margin.

The following table shows the decrease in our net interest margin in the three and six months ended June 30, 2017, but it also indicates the impact that the decrease in our net income had on our annualized returns on average assets and average equity during that period, as compared to the corresponding three- and six-month periods of 2016:

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 2016 filed with the SEC on March 14, 2017, 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 Statement of 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.

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

The following table sets forth our interest income, interest expense and net interest income, and our annualized net interest margin for the three and six months ended June 30, 2017 and 2016, respectively:

Net interest income increased by 4.0% for the three months ended June 30, 2017, as compared to the corresponding period in 2016. In the six months ended June 30, 2017, net interest income increased by 5.1% in comparison to the six months ended June 30, 2016.

For the three months ended June 30, 2017, net interest income rose by $758 thousand as compared to the same period in 2016. Total interest income increased by $799 thousand, principally because of a $692 thousand increase in our investment securities earnings, supplemented by a $144 thousand increase in interest earned on our deposits with other banks, including the Federal Reserve Bank of San Francisco. The reduction in our net interest margin was primarily the result of a 0.28% decrease in the average yield on a significantly larger average balance in our loan portfolio that was only slightly offset by a decrease of 0.02% in the average rate on our average interest-bearing liabilities.

During the six months ended June 30, 2017, net interest income was $1.8 million higher than in the year-earlier period due to an increase of $2.0 million in total interest income. The rise in interest income was due primarily to $1.2 million in higher earnings on our investment securities portfolio, supplemented by $483 thousand more in income from our loan portfolio and an increase of $248 thousand in returns on our deposits with other banks. The decrease in our net interest margin was the result of a 0.29% decrease in the average yield on a significantly larger average balance

in our loan portfolio that was partially offset by a higher average yield on a substantially larger investment securities portfolio, which together were only slightly offset by a decrease of 0.01% in the average rate on our average interest-bearing liabilities.

The following table sets forth information regarding our average balance sheet, annualized yields on interest-earning assets and interest rates on interest-bearing liabilities, the interest rate spread and the interest rate margin for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended June 30,
	2017							2016
	Average Balance		Interest Earned/Paid		Average Yield/Rate			Average Balance		Interest Earned/Paid		Average Yield/Rate
Interest earning assets:
Short term investments¹	$	157,158	$	248		0.63	%	$	123,392	$	104		0.34	%
Investment Securities²		528,129		1,941		1.47	%		372,416		1,249		1.34	%
Loans³		1,196,179		18,079		6.05	%		1,146,287		18,116		6.32	%
Total earning assets		1,881,466		20,268		4.31	%		1,642,095		19,469		4.74	%
Noninterest earning assets		87,095							81,414
Total Assets	$	1,968,561						$	1,723,509
Interest-bearing liabilities:
Interest-bearing checking accounts	$	266,357	$	81		0.12	%	$	202,885	$	57		0.11	%
Money market and savings accounts		1,002,204		433		0.17	%		868,188		388		0.18	%
Certificates of deposit		50,410		38		0.30	%		41,227		34		0.33	%
Other borrowings		-		-		0.00	%		2,399		32		1.33	%
Total interest-bearing liabilities		1,318,971		552		0.17	%		1,114,699		511		0.18	%
Non-interest bearing liabilities		513,739							490,480
Total Liabilities		1,832,710							1,605,179
Stockholders’ equity		135,851							118,330
Total Liabilities and Stockholders’ Equity	$	1,968,561						$	1,723,509

Net interest income			$	19,716						$	18,958

Interest rate spread						4.14	%						4.56	%
Net interest margin						4.19	%						4.62	%

	Six Months Ended June 30,
	2017							2016
	Average Balance		Interest Earned/Paid		Average Yield/Rate			Average Balance		Interest Earned/Paid		Average Yield/Rate
Interest earning assets:
Short term investments¹	$	134,051	$	431		0.64	%	$	120,000	$	206		0.34	%
Investment Securities²		524,487		3,693		1.41	%		357,814		2,451		1.37	%
Loans³		1,188,540		35,231		5.93	%		1,118,309		34,748		6.21	%
Total earning assets		1,847,078		39,355		4.26	%		1,596,123		37,405		4.69	%
Noninterest earning assets		84,203							78,779
Total Assets	$	1,931,281						$	1,674,902
Interest-bearing liabilities:
Interest-bearing checking accounts	$	274,478	$	163		0.12	%	$	193,246	$	109		0.11	%
Money market and savings accounts		973,465		843		0.17	%		844,413		759		0.18	%
Certificates of deposit		50,683		76		0.30	%		42,852		72		0.33	%
Other borrowings		-		-		0.00	%		1,350		35		2.59	%
Total interest-bearing liabilities		1,298,626		1,082		0.17	%		1,081,861		974		0.18	%
Non-interest bearing liabilities		497,949							476,620
Total Liabilities		1,796,575							1,558,481
Stockholders’ equity		134,706							116,421
Total Liabilities and Stockholders’ Equity	$	1,931,281						$	1,674,902

Net interest income			$	38,273						$	36,431

Interest rate spread						4.09	%						4.51	%
Net interest margin						4.14	%						4.56	%

For the three months ended June 30, 2017, our total average earning assets increased by $239.4 million as compared to the same period in 2016, attributable to the $155.7 million increase in our average investment securities portfolio, the $49.9 million increase in our average loan portfolio and the $33.8 million increase in average short-term investments. Average non-interest earning assets increased by $5.7 million, principally due to a $3.0 million increase in cash and due from banks and a $3.0 million investment in an unconsolidated subsidiary. The overall year-over-year growth of 14.6% in our average earning assets was the result of continued growth in our deposit base and an increase in non-interest bearing liabilities, supplemented by growth in our average stockholders’ equity. In the three months ended June 30, 2017, average total interest-bearing liabilities increased by $204.3 million in comparison to the three months ended June 30, 2016, comprised of a $134.0 million increase in average interest-bearing money market and savings accounts and an increase in average interest-bearing checking accounts by $63.5 million that resulted from improvements in the level of economic activity in the island markets that we serve, but also reflects the growth of $9.2 million in average interest-bearing certificates of deposit. The additional increase of $23.3 million in average non-interest bearing liabilities, primarily in traditional checking accounts, resulted in an overall increase of $227.5 million in average total liabilities. During the first half of 2017, average stockholders’ equity increased by $17.5 million (14.8%) in comparison to the year-earlier period, which included the issuance of $9.8 million in non-cumulative perpetual preferred stock during the fourth quarter of 2016.

Our interest rate spread decreased by 0.42% and our net interest margin dropped by 0.43% in the three months ended June 30, 2017, as compared to the same period in 2016. The decrease in our interest rate spread is primarily attributed to the 0.43% decrease in the average yield on our interest earning assets, which was tempered by a 0.01% decrease in the average interest rate on our interest-bearing liabilities. The 0.43% decrease in our net interest margin resulted from the 14.8% increase in our average total interest-earning assets exceeding the 4.0% increase in our net interest income.

During the six months ended June 30, 2017, our average earning assets increased by $251.0 million (15.7%) from the average for the six months ended June 30, 2016, due to an increase of $166.7 million in our average holdings of investment securities, growth of $70.2 million in our average loan portfolio and a rise of $14.1 million in our short-term investments. In the six months ended June 30, 2017, our average noninterest earning assets increased by $5.4 million in comparison to the six months ended June 30, 2016, notably because of a rise of $3.5 million in other assets and a $2.0 million increase in cash and due from banks, raising our total average assets to $1.93 billion, an increase of $256.4 million (15.3%) from the same period during the previous year. The increase in average total assets during the six months ended June 30, 2017, compared to the previous year was funded by an increase in total average liabilities of $238.1 million, supplemented by the growth in our average stockholders’ equity of $18.3 million (15.7%). In addition to the growth of $21.3 million in average non-interest bearing liabilities, which are primarily traditional checking account balances, the $216.8 million increase in our average total interest-bearing liabilities was comprised of an expansion of $129.1 million in our average money market and savings account balances, a $18.2 million increase in average interest-bearing checking accounts and an increase of $7.8 million in average certificate of deposit balances, partially offset by the elimination of $1.4 million in other borrowings.

Our interest rate spread and net interest margin both decreased by 0.42% during the first six months ended June 30, 2017, when compared to the same period of 2016. The reduction in our interest rate spread was the result of a decrease of 0.43% in the yield on our average total earning assets, while the cost of our average interest-bearing liabilities was reduced by just 0.01%. The lower yield on our average total earning assets was primarily caused by a drop of 0.29% in the yield on our average loan balances, but this was partially offset by the 0.30% and 0.04% increases in yield on our average short-term investments and on our average holdings of investment securities, respectively, the impacts of which were much smaller because of their lower balances relative to our loan portfolio. Our lower net interest margin during the six months ended June 30, 2017, in comparison to the previous year resulted from the 5.1% growth in our net interest income being significantly less than the 15.7% expansion of our average total earning assets. (Some of the figures in this and the previous three paragraphs may appear to differ from the preceding table due to rounding.)

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 three- and six-month periods ending June 30, 2017, in comparison to the same periods ending June 30, 2016:

	Three Months Ended 2017 vs. 2016
	(In thousands)
				Attributable to:
	Net Change in Interest Income/Expense			Change in Rate			Change in Volume
Interest income:
Short term investments	$	144		$	110		$	34
Investment Securities		692			129			563
Loans		(37	)		(3,179	)		3,142
Total interest income	$	799		$	(2,940	)	$	3,739

Interest expense:
Interest-bearing checking accounts	$	24		$	5		$	19
Money market and savings accounts		45			(77	)		122
Certificates of deposit		4			(18	)		22
Other borrowings		(32	)		(16	)		(16	)
Total interest expense	$	41		$	(106	)	$	147

Net interest income	$	758		$	(2,834	)	$	3,592


	Six Months Ended 2017 vs. 2016
	(In thousands)
				Attributable to:
	Net Change in Interest Income/Expense			Change in Rate			Change in Volume
Interest income:
Short term investments	$	225		$	198		$	27
Investment Securities		1,242			71			1,171
Loans		483			(3,487	)		3,970
Total interest income	$	1,950		$	(3,218	)	$	5,168

Interest expense:
Interest-bearing checking accounts	$	54		$	6		$	48
Money market and savings accounts		84			(74	)		158
Certificates of deposit		4			(17	)		21
Other borrowings		(35	)		(18	)		(17	)
Total interest expense	$	108		$	(103	)	$	211

Net interest income	$	1,842		$	(3,115	)	$	4,957

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 incurred 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 may 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 and six months ended June 30, 2017, the Bank’s provision for loan losses was $1.2 million and $2.4 million, respectively, which was $1 thousand lower and $37 thousand higher than during the corresponding periods of 2016.

Management believes that the provision recorded was sufficient to mitigate the risk of loss inherent in our gross loan portfolio of $1.16 billion at June 30, 2017, down by $13.3 million from $1.18 billion at December 31, 2016, and to replenish the allowance for net loan charge-offs of $2.4 million

recorded during the same period. The allowance for loan losses at June 30, 2017, stood at $15.4 million or 1.32% of total gross loans outstanding as of the balance sheet date, a decrease of $64 thousand (0.4%) from December 31, 2016. We recorded net loan charge-offs of $1.1 million and net recoveries of $641 thousand for the three-month periods ended June 30, 2017 and 2016, respectively, and net loan charge-offs of $2.4 million during the first six months of 2017, compared to $540 thousand in net charge-offs for the first six months of 2016. 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.

The table below represents the major components of non-interest income and the changes therein for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended June 30,										Six Months Ended June 30,
	2017 Amount		2016 Amount		Amount Change			Percent Change			2017 Amount			2016 Amount		Amount Change			Percent Change
Non-interest Income
Service charges and fees	$	1,452	$	1,531	$	(79	)		-5.2	%	$	2,850		$	2,964	$	(114	)		-3.8	%
Investment securities gains (losses), net		-		120		(120	)		-100.0	%		(13	)		130		(143	)		-110.0	%
Income from merchant services		598		511		87			17.0	%		1,188			767		421			54.9	%
Income from cardholders		191		430		(239	)		-55.6	%		359			695		(336	)		-48.3	%
Trustee fees		259		221		38			17.2	%		455			359		96			26.7	%
Other income		678		707		(29	)		-4.1	%		1,378			1,466		(88	)		-6.0	%
Total Non-Interest Income	$	3,178	$	3,520	$	(342	)		-9.7	%	$	6,217		$	6,381	$	(164	)		-2.6	%

For the three months ended June 30, 2017, non-interest income totaled $3.2 million, which represented a decrease of $342 thousand (9.7%) as compared to the same period in 2016. The reduction is primarily attributed to the $239 thousand decrease in income from cardholders, supplemented and attenuated by normal fluctuations in other elements of non-interest income. The decrease in income from cardholders was primarily the result of a $350 thousand VISA loyalty bonus that was received in the prior period, but no corresponding bonus was received during the three months ended June 30, 2017.

Our non-interest income decreased by $164 thousand (2.6%) during the six months ended June 30, 2017, from the same period a year earlier. Much of this decrease, in the amount of $336 thousand, was due to a drop in income from cardholders that resulted from a $350 thousand VISA loyalty bonus that was received in June 2016, as mentioned in the previous paragraph. There was also a net loss of $13 thousand on sales of investment securities, for a decrease of $143 thousand from the previous year’s net gain of $130 thousand, a smaller decrease of $114 thousand in service charges and fees because of decreases of $145 thousand in service charges on savings accounts, and a $100 thousand reduction in Federal Home Loan Mortgage Corporation (“Freddie Mac”) fees, due to a Mortgage Servicing Rights valuation adjustment on the Freddie Mac portfolio. These decreases in service charges and fees were partially offset by increases in insurance commissions, Bank Owned Life Insurance income, and financial services fee income. The above decreases in non-interest income were partially offset by the increase of $421 thousand in our income from merchant services that resulted from a reduction in cross-border fees charged by one card company, an increase in the number of merchants serviced, and the discontinuation of services to a merchant for which our costs of providing the services exceeded our revenues from the merchant.

The table below represents the major components of non-interest expense and the changes for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended June 30,										Six Months Ended June 30,
	2017 Amount		2016 Amount		Amount Change			Percent Change			2017 Amount		2016 Amount		Amount Change			Percent Change
Non-Interest Expense:
Salaries & employee benefits	$	8,555	$	8,082	$	473			5.9	%	$	16,925	$	15,496	$	1,429			9.2	%
Occupancy		1,695		1,576		119			7.6	%		3,251		3,118		133			4.3	%
Equipment and depreciation		2,116		1,800		316			17.6	%		4,138		3,508		630			18.0	%
Insurance		404		413		(9	)		-2.2	%		809		813		(4	)		-0.5	%
Telecommunications		412		402		10			2.5	%		849		801		48			6.0	%
FDIC insurance assessment		343		321		22			6.9	%		739		646		93			14.4	%
Professional services		485		579		(94	)		-16.2	%		937		1,164		(227	)		-19.5	%
Contract services		453		491		(38	)		-7.7	%		957		932		25			2.7	%
Other real estate owned		11		15		(4	)		-26.7	%		66		16		50			312.5	%
Stationery & supplies		223		265		(42	)		-15.8	%		418		484		(66	)		-13.6	%
Training & education		362		315		47			14.9	%		668		515		153			29.7	%
General, administrative & other		2,198		2,201		(3	)		-0.1	%		4,655		4,128		527			12.8	%
Total Non-Interest Expense	$	17,257	$	16,460	$	797			4.8	%	$	34,412	$	31,621	$	2,791			8.8	%

For the three months ended June 30, 2017, non-interest expense totaled $17.3 million, which represented a $797 thousand (4.8%) increase as compared to the same period in 2016. The increase is primarily attributed to the $473 thousand rise in salaries and employee benefits, the $316 thousand increase in equipment and depreciation expense, and the $119 thousand increase in occupancy expense. The increase in salaries and employee benefits was due to normal, recurring merit increases in salaries and a small increase in the number of full-time equivalent (FTE) employees needed to accommodate the growth of $245.9 million (14.3%) in the assets of the Bank from June 30, 2016. The Company’s FTE count at June 30, 2017, December 31, 2016, and June 30, 2016 were 558, 537, and 580, respectively. The increase in equipment and depreciation expense was primarily due to an increase in computer equipment maintenance expense, and the increase in occupancy expense was due to increase in utilities costs and the expense of repairs to buildings, partially offset by a decrease in rental income.

For the six months ended June 30, 2017, total non-interest expense increased by $2.8 million (8.8%) from the year-earlier period, more than half of which was due to an increase of $1.4 million in salaries and employee benefits, which was in part due to normal, recurring employee salaries increases, but also reflects the need for additional FTE personnel to accommodate the increased activity associated with our growth in assets from June 30, 2016. We also experienced a $630 thousand increase in equipment and depreciation expense, and a rise of $527 thousand in general, administrative and other expense, partially offset by a reduction in professional services expense. The rise in equipment and depreciation expense was due to an increase in computer equipment maintenance expense, and the increase in general, administrative and other expense was primarily due to an increase in public relations expense associated with the Bank’s 45^th anniversary celebration events. These increases were partially offset by the decrease of $227 thousand in professional services expense that resulted from additional audit fees incurred in the prior year.

For the three months ended June 30, 2017, the Bank recorded an income tax expense of $1.2 million. This was $243 thousand lower than the income tax expense recorded for the corresponding period in 2016. The primary cause of this decrease was the reduction in pre-tax net income of $380 thousand.

During the six months ended June 30, 2017, our income tax expense was $2.2 million, 14.9% lower than during the year-earlier period. This was partially due to the 13.0% decrease in our income before income taxes.

As of June 30, 2017, total assets were $1.97 billion, an increase of 2.4% from the $1.92 billion at December 31, 2016. This $46.3 million increase was comprised of the $35.0 million rise in our total cash and cash equivalents, the increase of $17.8 million in our investment portfolio and the $6.0 million expansion in items collectively categorized as other assets, partially offset by a decrease of $13.5 million in our loan portfolio, net of the allowance for loan losses and deferred fee income. The reduction of our net loans lowered the proportion of net loans to total assets from 60.3% to 58.2% from December 31, 2016, to June 30, 2017.

The following table sets forth the composition of our interest-earning assets at June 30, 2017, as compared to December 31, 2016:

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 June 30, 2017, and December 31, 2016, follows:

	June 30, 2017						December 31, 2016
	Amount			Percent			Amount			Percent
Commercial
Commercial & industrial	$	225,575			19.4	%	$	248,059			21.1	%
Commercial mortgage		536,034			46.1	%		552,272			47.0	%
Commercial construction		15,185			1.3	%		6,421			0.5	%
Commercial agriculture		731			0.1	%		747			0.1	%
Total commercial		777,525			66.9	%		807,499			68.7	%
Consumer
Residential mortgage		139,755			12.0	%		143,951			12.2	%
Home equity		474			0.0	%		480			0.0	%
Automobile		30,993			2.7	%		30,798			2.6	%
Other consumer loans¹		213,916			18.4	%		193,279			16.4	%
Total consumer		385,138			33.1	%		368,508			31.3	%
Gross loans		1,162,663			100.0	%		1,176,007			100.0	%
Deferred fee (income) costs, net		(2,786	)					(2,527	)
Allowance for loan losses		(15,371	)					(15,435	)
Loans, net	$	1,144,506					$	1,158,045

At June 30, 2017, total gross loans decreased by $13.3 million to $1.16 billion from $1.18 billion at December 31, 2016. The decrease in loans was largely attributed to a $30.0 million decrease in commercial loans to $777.5 million at June 30, 2017, from $807.5 million at December 31, 2016. The decrease in commercial loans was due to the $22.5 million decrease in commercial & industrial loans and the $16.2 million decrease in commercial mortgage loans. These were partially offset by the $8.8 million increase in commercial construction loans. The effect of the decrease in commercial loans was attenuated by a $16.6 million increase in consumer loans to $385.1 million at June 30, 2017, up from $368.5 million at December 31, 2016. The increase in consumer loans was due to the $20.6 million increase in other consumer loans, but this increase was partially offset by the decline of $4.2 million in residential mortgage loans.

At June 30, 2017, loans outstanding were comprised of approximately 65.74% variable rate loans and 34.26% fixed rate loans, compared to 67.37% variable and 32.63% fixed rate at December 31, 2016, and 67.97% variable rate and 32.03% fixed rate loans at June 30, 2016.

Since it first opened in 1972, the Bank has expanded its operations and its branch network, first in Guam, then in the other islands of our region and in San Francisco, California. In the interests of enhancing performance and stability through market and industry diversification, the Bank has increased its focus on growth in the San Francisco area in recent years, adding personnel with experience and expertise in the Bay Area. The following table provides figures for loans, net of allowance and deferred fees, in the Bank’s administrative regions for December 31, 2015 and 2016, and June 30, 2017:

As the table indicates, the Bank’s total net loans decreased by 1.2% during the six months ended June 30, 2017, but increased by 9.8% during 2016. By way of comparison, loans in the California region increased by 12.0% during the first half of 2017 and by 17.4% in 2016. Loans in the Freely Associated States of Micronesia increased by 8.9% during the first six months of 2017 and by 33.8% during 2016. The reduction of loan balances by $56.3 million, or 7.9%, in Guam during the first six months of 2017 was primarily due to the payoff of one large commercial loan during the second quarter of the year, after having grown by $38.1 million (5.7%) in 2016, and more than offset the increases in the other regions in which we operate. Since the Company was established in 2011, the California region has provided continued support for the expansion of the Bank

In the current lending and interest rate environment, and in order to maintain sufficient liquidity in the ordinary course of business and in anticipation of one large withdrawal, the Bank held $179.7 million in unrestricted interest-earning deposits with financial institutions at June 30, 2017, an increase of $28.7 million, or 19.0%, from the $150.9 million in such deposits at December 31, 2016. From December 31, 2016, to June 30, 2017, the

Company’s combined investment portfolio increased by $17.8 million, or 3.4%, from $516.0 million to $533.8 million. The growth in the investment portfolio was comprised of a $21.0 million increase in the available-for-sale securities, which rose by 5.0%, from $419.9 million to $440.9 million, partially offset by a $3.2 million decrease in held-to-maturity securities, which declined from $96.2 million to $92.9 million.

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

The following table contains information regarding our nonperforming assets as well as restructured loans as of June 30, 2017, and December 31, 2016:

	June 30, 2017		December 31, 2016
Non-accrual loans:
Commercial & industrial	$	261	$	1,094
Commercial mortgage		6,061		6,390
Residential mortgage		6,181		6,353
Home equity		-		35
Other consumer 1		138		174
Total non-accrual loans	$	12,641	$	14,046

Loans past due 90 days and still accruing:
Commercial & industrial	$	85	$	1
Commercial mortgage		-		-
Commercial construction		-		-
Residential mortgage		99		137
Home equity		-		-
Automobile		70		104
Other consumer¹		1,182		1,640
Total loans past due 90 days and still accruing	$	1,436	$	1,882
Total nonperforming loans	$	14,077	$	15,928

Other real estate owned (OREO):
Commercial real estate	$	2,075	$	2,078
Residential real estate		507		668
Total other real estate owned	$	2,582	$	2,746
Total nonperforming assets	$	16,659	$	18,674

Restructured loans:
Accruing loans	$	235	$	265
Non-accruing loans (included in nonaccrual loans above)		5,459		6,589
Total restructured loans	$	5,694	$	6,854

The above table indicates that nonperforming loans decreased by $1.9 million during the first six months of 2017, which resulted from the decrease in total non-accrual loans by $1.4 million, from $14.0 million to $12.6 million, and the decrease in total loans past due 90 days and still accruing by $446 thousand to $1.4 million, down from $1.9 million at December 31, 2016. The decrease in total loans past due 90 days and still accruing was primarily due to the $458 thousand reduction in other consumer loans in this category. The reduction in total non-accrual loans is primarily attributed to the decreases in this category of commercial & industrial loans by $833 thousand and of commercial mortgage loans by $329 thousand.

At June 30, 2017, the Bank’s largest nonperforming loans are two commercial real estate mortgage loan relationships in the amount of $5.2 million, both of which are secured by real estate located in Guam. 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 allowance for loan

losses are adequate to cover these loans; however, should property values deteriorate, additional write-downs or additional provisions may be necessary.

The allowance for loan losses was $15.4 million, or 1.32% of outstanding gross loans as of June 30, 2017, as compared to $15.4 million, or 1.31% of outstanding gross loans at December 31, 2016.

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 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 loans’ credit and collateral fair value. 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.

	Commercial			Residential Mortgages			Consumer			Total
	(Dollars in thousands)
Six Months Ended June 30, 2017
Allowance for loan losses:
Balance at beginning of period	$	8,599		$	1,878		$	4,958		$	15,435
Charge-offs		-			(30	)		(3,198	)	$	(3,228	)
Recoveries		30			3			764		$	797
Provision		200			6			2,161		$	2,367
Balance at end of period	$	8,829		$	1,857		$	4,685		$	15,371

Three Months Ended June 30, 2017
Allowance for loan losses:
Balance at beginning of period	$	8,685		$	1,879		$	4,771		$	15,335
Charge-offs		-			(29	)		(1,579	)	$	(1,608	)
Recoveries		20			1			439		$	460
Provision		124			6			1,054		$	1,184
Balance at end of period	$	8,829		$	1,857		$	4,685		$	15,371

Allowance balance at end of period related to:
Loans individually evaluated for impairment	$	-		$	-		$	-		$	-
Loans collectively evaluated for impairment	$	8,829		$	1,857		$	4,685		$	15,371

Loan balances at end of period:
Loans individually evaluated for impairment	$	6,557		$	6,181		$	138		$	12,876
Loans collectively evaluated for impairment		770,968			134,048			244,771			1,149,787
Ending Balance	$	777,525		$	140,229		$	244,909		$	1,162,663

Six Months Ended June 30, 2016
Allowance for loan losses:
Balance at beginning of period	$	6,890		$	1,853		$	5,416		$	14,159
Charge-offs		(206	)		(91	)		(2,537	)	$	(2,834	)
Recoveries		1,655			3			636		$	2,294
Provision		82			245			2,003		$	2,330
Balance at end of period	$	8,421		$	2,010		$	5,518		$	15,949

Three Months Ended June 30, 2016
Allowance for loan losses:
Balance at beginning of period	$	6,637		$	1,965		$	5,521		$	14,123
Charge-offs		-			(20	)		(1,354	)	$	(1,374	)
Recoveries		1,661			2			352		$	2,015
Provision		123			63			999		$	1,185
Balance at end of period	$	8,421		$	2,010		$	5,518		$	15,949

Allowance balance at end of period related to:
Loans individually evaluated for impairment	$	-		$	-		$	-		$	-
Loans collectively evaluated for impairment	$	8,421		$	2,010		$	5,518		$	15,949

Loan balances at end of period:
Loans individually evaluated for impairment	$	8,595		$	7,199		$	145		$	15,939
Loans collectively evaluated for impairment		792,189			137,857			214,950			1,144,996
Ending Balance	$	800,784		$	145,056		$	215,095		$	1,160,935

Year Ended December 31, 2016

Allowance for loan losses:
Balance at beginning of year	$	6,890		$	1,853		$	5,416		$	14,159
Charge-offs		(276	)		(121	)		(5,234	)		(5,631	)
Recoveries		1,691			6			1,310			3,007
Provision		294			140			3,466			3,900
Balance at end of year	$	8,599		$	1,878		$	4,958		$	15,435

Allowance balance at end of year related to:
Loans individually evaluated for impairment	$	-		$	-		$	-		$	-
Loans collectively evaluated for impairment	$	8,599		$	1,878		$	4,958		$	15,435

Loan balances at end of year:
Loans individually evaluated for impairment	$	7,749		$	6,388		$	174		$	14,311
Loans collectively evaluated for impairment		799,750			138,043			223,903			1,161,696
Ending Balance	$	807,499		$	144,431		$	224,077		$	1,176,007

Total cash and cash equivalents were $211.7 million and $176.7 million at June 30, 2017, and December 31, 2016, respectively. 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 future events such as the repayment of borrowings and scheduled withdrawals, and actual cash on hand in the Bank’s branches. The increase in the balance during the period was primarily attributed to the early payoff of an individual large loan.

The following table sets forth the composition of our cash and cash equivalent balances at June 30, 2017, and December 31, 2016:

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

At June 30, 2017, the carrying value of the investment securities portfolio (excluding ASC Trust Corporation investment and Federal Home Loan Bank stock) totaled $533.8 million, which represents a $17.8 million increase from the portfolio balance of $516.0 million at December 31, 2016. The table below sets forth the amortized cost and fair value of our investment securities portfolio, with gross unrealized gains and losses, at June 30, 2017, and December 31, 2016:

	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities Available-for-Sale
U.S. government agency and sponsored enterprise (GSE) debt securities	$	112,611	$	1	$	(685	)	$	111,927
U.S. government agency pool securities		251,683		61		(1,458	)		250,286
U.S. government agency or GSE residential mortgage-backed securities		79,179		32		(539	)		78,672
Total	$	443,473	$	94	$	(2,682	)	$	440,885
Securities Held-to-Maturity
U.S. government agency and sponsored enterprise (GSE) debt securities	$	45,044	$	939	$	(45	)	$	45,938
U.S. government agency pool securities		12,784		37		(25	)		12,796
U.S. government agency or GSE residential mortgage-backed securities		35,094		461		(236	)		35,319
Total	$	92,922	$	1,437	$	(306	)	$	94,053

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities Available-for-Sale
U.S. government agency and sponsored enterprise (GSE) debt securities	$	125,476	$	6	$	(1,051	)	$	124,431
U.S. government agency pool securities		238,615		124		(1,613	)		237,126
U.S. government agency or GSE residential mortgage-backed securities		59,049		36		(762	)		58,323
Total	$	423,140	$	166	$	(3,426	)	$	419,880
Securities Held-to-Maturity
U.S. government agency and sponsored enterprise (GSE) debt securities	$	44,909	$	956	$	(36	)	$	45,829
U.S. government agency pool securities		13,591		14		(91	)		13,514
U.S. government agency or GSE residential mortgage-backed securities		37,667		373		(320	)		37,720
Total	$	96,167	$	1,343	$	(447	)	$	97,063

The amortized cost, estimated fair value and weighted average yields of investment securities by contractual maturity at June 30, 2017, and December 31, 2016, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or borrowers the right to prepay obligations with or without call or prepayment penalties. At June 30, 2017, obligations of U.S. government corporations and agencies totaling $533.8 million consist predominantly of Small Business Administration agency pool securities totaling $263.1 million and residential mortgage-backed securities totaling $113.8 million whose contractual maturity, or principal repayment, will follow the repayment of the underlying small business loans or mortgages. For purposes of the following table, the entire outstanding balance of these SBA pools and mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At June 30, 2017, the Bank estimates the average remaining life of these SBA pools and mortgage-backed securities to be approximately 5.32 years and 3.95 years, respectively. The weighted average yield on the entire portfolio increased by 29 basis points, to 1.63% at June 30, 2017, from 1.34% at December 31, 2016. This increase was primarily the result of higher market interest rates.

	June 30, 2017
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Weighted Average Yield
Due within one year	$	201	$	202	$	2,494	$	2,487		2.51	%
Due after one but within five years		116,564		115,850		58,437		59,699		1.28	%
Due after five but within ten years		47,444		47,226		20,213		20,268		1.62	%
Due after ten years		279,264		277,607		11,778		11,599		1.74	%
Total	$	443,473	$	440,885	$	92,922	$	94,053		1.63	%

	December 31, 2016
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Weighted Average Yield
Due within one year	$	-	$	-	$	-	$	-		0.00	%
Due after one but within five years		131,023		129,943		57,761		58,831		1.34	%
Due after five but within ten years		44,787		44,627		14,427		14,609		1.38	%
Due after ten years		247,330		245,310		23,979		23,623		1.33	%
Total	$	423,140	$	419,880	$	96,167	$	97,063		1.34	%

The following table shows the gross unrealized losses and fair value of investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at June 30, 2017, and December 31, 2016:

	June 30, 2017
	Less Than Twelve Months					More Than Twelve Months					Total
	Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value
Securities Available for Sale
U.S. government agency and government sponsored enterprise (GSE) debt securities	$	(685	)	$	106,934	$	-		$	-	$	(685	)	$	106,934
U.S. government agency pool securities		(609	)		146,739		(849	)		78,599		(1,458	)		225,338
U.S. government agency or GSE mortgage-backed securities		(436	)		48,046		(103	)		14,113		(539	)		62,159
Total	$	(1,730	)	$	301,719	$	(952	)	$	92,712	$	(2,682	)	$	394,431

Securities Held to Maturity
U.S. government agency and GSE debt securities	$	(45	)	$	16,029	$	-		$	-	$	(45	)	$	16,029
U.S. government agency pool securities		-			782		(25	)		3,512		(25	)		4,294
U.S. government agency or GSE mortgage-backed securities		(236	)		16,540		-			-		(236	)		16,540
Total	$	(281	)	$	33,351	$	(25	)	$	3,512	$	(306	)	$	36,863

	December 31, 2016
	Less Than Twelve Months					More Than Twelve Months					Total
	Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value
Securities Available for Sale
U.S. government agency and government sponsored enterprise (GSE) debt securities	$	(1,051	)	$	116,516	$	-		$	-	$	(1,051	)	$	116,516
U.S. government agency pool securities		(597	)		174,370		(1,016	)		34,222		(1,613	)		208,592
U.S. government agency or GSE mortgage-backed securities		(693	)		42,997		(69	)		9,225		(762	)		52,222
Total	$	(2,341	)	$	333,883	$	(1,085	)	$	43,447	$	(3,426	)	$	377,330

Securities Held to Maturity
U.S. government agency and GSE debt securities	$	(36	)	$	16,052	$	-		$	-	$	(36	)	$	16,052
U.S. government agency pool securities		(9	)		2,748		(82	)		10,144		(91	)		12,892
U.S. government agency or GSE mortgage-backed securities		(320	)		16,990		-			-		(320	)		16,990
Total	$	(365	)	$	35,790	$	(82	)	$	10,144	$	(447	)	$	45,934

The Company does not believe that any of the investment securities that were in an unrealized loss position as of June 30, 2017, which included a total of 144 securities, were other-than-temporarily impaired. Specifically, the 144 securities are comprised of the following: 83 Small Business Administration (SBA) Pool securities, 21 mortgage-backed securities issued by the Government National Mortgage Association (GNMA), 9 mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and 7 agency securities issued by the Federal Home Loan Bank (FHLB), 2 mortgage-backed securities and 3 step up bonds issued by Federal Home Loan Mortgage Corporation (FHLMC), 1 agency security issued by Federal Farm Credit Banks (FFCB), and 18 U.S. Treasury securities.

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. In addition, these securities and their repayment are sponsored by the U.S. Government or its various agencies and therefore, it is unlikely that they will ever be settled for less than par. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not likely that the Company will be required to sell the investment securities before recovery of their amortized cost, which may be at maturity.

At June 30, 2017, total deposit liabilities increased by $40.5 million, to $1.82 billion, as compared to $1.78 billion in total deposits at December 31, 2016. Non-interest bearing deposits increased by $39.4 million, to $508.9 million at June 30, 2017, from $469.5 million at December 31, 2016, while interest-bearing deposits increased by $1.1 million, to $1.31 billion at June 30, 2017, only nominally changed from December 31, 2016. The 2.3% increase in total deposits was primarily due to an increase in government deposits.

The following table sets forth the composition of our interest-bearing deposit portfolio with the balances and average interest rates at June 30, 2017 and 2016, respectively:

As mentioned earlier, the Bank has expanded its operations and its branch network since it first opened in 1972, first in Guam, then in the other islands of our region and in San Francisco, California. As time has passed, the Bank has gathered market share in each of the islands. In recent years, in order to diversify its geographic market, the Bank has increased its focus on growth in the California region. The following table provides figures for deposits in the Bank’s administrative regions at year end December 31, 2015 and 2016, and at June 30, 2017:

During the six months ended June 30, 2017, the Bank’s deposits increased by $40.5 million, or 2.3%, while in the full year of 2016, deposits increased by a total of $356.0 million. Our branches in Guam experienced a decrease of $25.5 million in deposits during the first half of 2017, while the deposits in our branches in the CNMI grew by $52.6 million and our FAS branches provided an additional $9.6 million. Our California region deposits increased by $3.8 million during the first six months of 2017.

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-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.

At June 30, 2017, and at December 31, 2016, the Company had no short-term borrowings.

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.

At June 30, 2017, 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 $652.6 million, up $56.0 million from $596.5 million at December 31, 2016. This increase is comprised of the $28.7 million rise in interest bearing deposits in banks, a $21.0 million increase in available-for-sale securities and the expansion of $6.3 million in cash and due from banks.

The Bank utilizes facilities, equipment and land under various operating leases with terms, including renewal options, ranging from 1 to 99 years. Some of these leases include scheduled rent increases. The total amount of the rent is being debited to expense on the straight-line method over the lease terms in accordance with ASU Topic 840 “Leases”. The Bank has recorded a deferred obligation of $940 thousand and $926 thousand as of June 30, 2017, and December 31, 2016, respectively, which has been included within other liabilities to reflect the excess of rent expense over cash paid on the leases.

At June 30, 2017, annual lease commitments under the above non-cancelable operating leases were as follows:

The Bank leases certain facilities from two separate entities in which two of its directors have separate ownership interests. Lease payments made to these entities during the six months ended June 30, 2017, and June 30, 2016, approximated $168 thousand and $142 thousand, respectively. For the three months ended June 30, 2017, and June 30, 2016, lease payments made to these entities approximated to $84 thousand and $70 thousand, respectively.

Additionally, the Bank leases office space to third parties, with original lease terms ranging from 3 to 5 years with option periods ranging up to 15 years. At June 30, 2017, minimum future rents to be received under non-cancelable operating sublease agreements were $32 thousand, $45 thousand, and $16 thousand for the periods ending December 31, 2017, 2018 and 2019, respectively.

A summary of rental activities for the six months ended June 30, 2017 and 2016, respectively, is as follows:

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

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

A summary of financial instruments with off-balance-sheet risk at June 30, 2017, and December 31, 2016, is as follows:

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 June 30, 2017, the maximum undiscounted future payments that the Bank could be required to make was $52.4 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 $21.0 thousand in reserve liabilities associated with commitments to extend credit and letters of credit at June 30, 2017.

Mortgage loans serviced for others are not included in the accompanying condensed consolidated statements of condition. The unpaid principal balances of mortgage loans serviced for others were $206.4 million and $211.0 million at June 30, 2017, and December 31, 2016, respectively. On June 30, 2017, and December 31, 2016, the Bank recorded mortgage servicing rights at their fair value of $1.5 million and $1.5 million, respectively.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of June 30, 2017, and December 31, 2016, the Bank met all capital adequacy requirements to which it is subject.

In July 2013, the U.S. banking regulatory agencies approved the U.S. version of Basel III. The version of Basel III adopted revises the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to make them consistent with Basel III and to meet the requirements of the Dodd-Frank Act. Many of the rules apply on a phased-in basis to all banking organizations, including the Company and the Bank. Among other things, the rules establish a new minimum common equity Tier 1 ratio (4.5% of risk-weighted assets), a higher minimum Tier 1 risk-based capital requirement (6.0% of risk-weighted assets) and a minimum non-risk-based leverage ratio (4.00%). An additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 (1.25% in 2017 and 0.625% in 2016) and must be met to avoid limitations on the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The new rules assign higher risk weighting to credit exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also change the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets, and include unrealized gains and losses on available-for-sale debt and equity securities (through a one-time opt out option for Standardized Banks (banks with less than $250 billion of total consolidated assets and less than $10 billion of foreign exposures) which the Company and the Bank elected at March 31, 2015). The rules, including alternative requirements for smaller community financial institutions like the Company and the Bank, will be phased in through 2019.

As of June 30, 2017, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized 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 FDIC notification that management believes have changed the Bank’s category. The Bank’s actual capital amounts and ratios as of June 30, 2017, and December 31, 2016, are also presented in the table.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
At June 30, 2017:
Total capital (to Risk Weighted Assets)	$	148,497		13.020	%	$	105,501		9.250	%	$	114,055		10.000	%
Tier 1 capital (to Risk Weighted Assets)	$	134,226		11.769	%	$	82,690		7.250	%	$	91,244		8.000	%
Tier 1 capital (to Average Assets)	$	134,226		6.878	%	$	90,252		4.625	%	$	97,569		5.000	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	129,226		11.330	%	$	65,582		5.750	%	$	74,136		6.500	%

At December 31, 2016:
Total capital (to Risk Weighted Assets)	$	144,827		12.610	%	$	99,023		8.625	%	$	114,809		10.000	%
Tier 1 capital (to Risk Weighted Assets)	$	130,463		11.360	%	$	76,061		6.625	%	$	91,847		8.000	%
Tier 1 capital (to Average Assets)	$	130,463		7.060	%	$	73,937		4.000	%	$	92,421		5.000	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	125,463		10.930	%	$	58,839		5.125	%	$	74,626		6.500	%

The Company’s required and actual capital amounts and ratios as of June 30, 2017, and December 31, 2016, were as follows:

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
At June 30, 2017
Total capital (to Risk Weighted Assets)	$	153,472		13.420	%	$	105,793		9.250	%	$	114,370		10.000	%
Tier 1 capital (to Risk Weighted Assets)	$	139,162		12.170	%	$	82,918		7.250	%	$	91,496		8.000	%
Tier 1 capital (to Average Assets)	$	138,873		7.110	%	$	90,394		4.625	%	$	97,723		5.000	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	129,380		11.310	%	$	65,763		5.750	%	$	74,341		6.500	%

At December 31, 2016
Total capital (to Risk Weighted Assets)	$	149,540		12.990	%	$	106,483		9.250	%	$	115,117		10.000	%
Tier 1 capital (to Risk Weighted Assets)	$	135,138		11.739	%	$	83,460		7.250	%	$	92,093		8.000	%
Tier 1 capital (to Average Assets)	$	135,138		7.299	%	$	85,633		4.625	%	$	92,576		5.000	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	125,355		10.889	%	$	66,192		5.750	%	$	74,826		6.500	%

Since the formation of BankGuam Holding Company in 2011, our assets have grown by 78.4% ($864.6 million), while our stockholders’ equity has grown by 53.9% ($47.8 million, including $36.2 million in retained earnings). The difference between these growth rates has challenged our ability to maintain our historically strong capital ratios. In order to support the Company’s continued growth and to provide sufficient resources to expand our subsidiary holdings, the Board approved the issuance of up to $10.0 million in non-cumulative perpetual preferred stock, issued to various accredited and a limited number of non-accredited investors, of which $9.8 million was issued during the year ended December 31, 2016, when the offering was closed.

The Bank’s 2011 Employee Stock Purchase Plan (the “2011 Plan”) was adopted by the Bank’s Board of Directors and approved by the Bank’s Stockholders on May 2, 2011, to replace the Bank’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 the Bank 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 stocks is granted to eligible employees during a quarterly offer period that is established from time to time by the Board of Directors of the Company. Eligible employees cannot accrue the right to purchase more than $25 thousand worth of stock at the fair market value at the beginning of each offer period. Eligible employees also may not purchase more than one thousand five hundred (1,500) shares of stock in any one offer period. The shares are purchased at 85% of the fair market price of the stock on the enrollment date.

The services provided by banks are crucial to the continuing performance of the economy, so it is very important that banks are able to conduct business as usual on an ongoing basis. In light of this, the Bank has developed a comprehensive business continuity plan to address whatever disruptions may directly affect customers or change internal processes, whether caused by man-made or natural events. Training in the plan components is conducted annually, and risk-based testing of the major processes and procedures within the Bank occur on a regular basis. 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 specific, detailed procedures for recovering quickly from any technology failure. The technology recovery procedures are actively tested, and are also implemented from time to time. The recovery time objectives for all major technological processes range from eight hours to 80 hours, 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.

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, perhaps more than any other industry, 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 is confident that its systems provide a reasonable assurance that the financial and personal data that it holds are secure.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2017. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2017, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s Rules and forms and is accumulated and communicated to management, including our Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the three months ended June 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our business, financial condition and results of operations are subject to various risks, including those discussed below and in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. Other than as reflected below, there have been no material changes from the risks contained in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Our business may be adversely affected by conditions in the financial markets and economic conditions generally.

The United States economy is recovering, moderately, from a downturn that started in 2007, but business activity and growth across industries and regions have not yet been fully restored. There are indications that the recovery is accelerating, and the decision of the Federal Open Market Committee, which guides current monetary policy actions on behalf of the Federal Reserve System in carrying out its broader monetary policies, to raise its target interest rate on December 14, 2016, expressed its confidence in the sustainability of recent economic growth in the United States. Consumer spending, liquidity and availability of credit are modestly improving, and the unemployment rate in the United States has fallen by more than half since October 2009, and the Federal Open Market Committee has raised its target Fed Funds rate twice since the beginning of 2017. Nonetheless, the unemployment rate is still relatively high in the principal island markets we serve.

The financial services industry was materially and adversely affected by the weakened economy and by the monetary policy responses intended to correct that weakness. The negative effect of historically low market interest rates reduced our interest rate margin despite us having established minimum rate levels on our variable rate loans. In order to retain core deposits and as a reputational matter, our consumer savings account rates have been higher than our competitors’ offerings for the past eight years. The slow recovery of the economy and continued elevated unemployment may negatively impact our operating results; however, the Bank has not experienced any adverse liquidity issues in recent years. Additionally, the remaining adverse changes in the economy may also continue to have a negative effect on the ability of our borrowers to make timely repayments of their loans. These factors could expose us to an increased risk of loan defaults and losses, and have an adverse impact on our earnings.

FDIC-insured financial institutions, including the Bank, are charged premiums to maintain the FDIC Deposit Insurance Fund at a certain level. In 2009, the FDIC collected a special assessment and revised its risk-based assessment system to replenish the FDIC Deposit Insurance Fund, which had been depleted by rising levels of bank failures and associated costs. In recent years, deposit premiums have decreased as the level of bank failures has returned to historical norms. However, if the costs of future bank failures increase, deposit insurance premiums may also increase, and there can be no assurance that assessments will not be changed in the future. Our FDIC deposit insurance expense for the year ended December 31, 2016, was $1.3 million.

Our profitability is dependent upon the economic conditions of the markets in which we operate.

We operate on ten relatively remote Pacific islands and in San Francisco, California, and, as a result, our financial condition and results of operations are affected by changes in the economic conditions in those areas. Our success depends upon the business activity, population, income levels, deposits and lending activity in these markets. Because some of our customers’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect those other market areas could reduce our growth rate, affect the ability of those customers to repay their loans, and generally affect our financial condition and results of operations. Other than in San Francisco, our lending operations are located in market areas dependent on tourism and fishing, along with a military presence and other federal government activities in Guam. Although the Commonwealth of the Northern Mariana Islands suffered setbacks in recent years because of a decline in its visitor industry, the failure of its garment industry and widespread typhoon damage, new construction activity and increased visitor arrivals are supporting a more rapid expansion of the economy. The other island economies have remained relatively stable. However, because of the magnified influence of external events, these small island economies tend to be somewhat more volatile than larger economic systems. Thus, our borrowers could be adversely impacted by a downturn in these sectors of the economy that could reduce the demand for loans and adversely impact the borrowers’ ability to repay their loans, which would, in turn, increase our nonperforming assets. Because of our geographic concentration in several relatively small island economies, we are less able than many regional or national financial institutions to diversify our credit risks across multiple dissimilar markets. In recent years, we have taken the initiative to expand our operations in California in an effort to increase and help to stabilize our profitability.

If we lost a significant portion of our low-cost deposits, it would negatively impact our liquidity and profitability.

Our profitability depends in part on our success in attracting and retaining a stable base of low-cost deposits. At December 31, 2016, 26.4% of our deposit base was comprised of non-interest bearing deposits, and the average rate on our interest-bearing deposits during 2016 was 0.17%. While we generally do not believe these core deposits are very sensitive to interest rate fluctuations, the competition for these deposits in our markets is strong. If we were to lose a significant portion of our low-cost deposits, it could negatively impact our liquidity and profitability. To help to mitigate this risk, we actively monitor our competitors’ deposit interest rates and will adjust our rates accordingly in order to maintain our deposit base.

We may be the subject of litigation, which could result in legal liability and damage to our business and reputation.

From time to time, we may be subject to claims or legal action from customers, employees or others. Financial institutions like the Company and the Bank are facing a growing number of significant class actions, including those based on the manner of calculation of interest on loans and the assessment of overdraft fees. Future litigation could include claims for substantial compensatory and/or punitive damages or claims for indeterminate

amounts of damages. We are also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and other agencies regarding our business. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Like other large financial institutions, we are also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information.

Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition and results of operations. In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all.

If we are limited in our ability to originate loans secured by commercial real estate we may face greater risk in our loan portfolio.

Federal banking agencies have issued guidance regarding high concentrations of commercial real estate loans within bank loan portfolios. The guidance requires financial institutions that exceed certain levels of commercial real estate lending compared with their total capital to maintain heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. If there is any deterioration in our commercial real estate portfolio or if our regulators conclude that we have not implemented appropriate risk management practices, it could adversely affect our business, and could result in the requirement to maintain increased capital levels. Such capital may not be available at that time, and may result in our regulators requiring us to reduce our concentration in commercial real estate loans.

If because of our concentration of commercial real estate loans, or for any other reasons, we are limited in our ability to originate loans secured by commercial real estate, our results of operations may be negatively impacted and we may incur greater risk in our loan portfolio.

The laws and regulations, including the Dodd-Frank Reform Act, applicable to the banking industry could change at any time, and these changes may adversely affect our business and profitability.

We are subject to extensive federal and state regulation. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably. The increased scope, complexity, and cost of corporate governance, reporting, and disclosure practices are proportionately higher for a company of our size and will affect our profitability more than that of some of our larger competitors. We expect to experience increasing compliance costs related to this supervision and regulation.

Also, the 2016 national election results and new administration have introduced additional uncertainty into future implementation and enforcement of the Dodd-Frank Reform Act and other financial sector regulatory requirements. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. The effects of any such recently enacted, or proposed, legislation and regulatory programs on us cannot reliably be determined at this time.

The Consumer Financial Protection Bureau (the “CFPB”) recently issued “ability-to-repay” and “qualified mortgage” rules that may have a negative impact on our loan origination process and foreclosure proceedings, which could adversely affect our business, operating results and financial condition.

On January 10, 2013, the CFPB issued a final rule to implement the “qualified mortgage” provisions of the Dodd-Frank Reform Act requiring mortgage lenders to consider consumers’ ability to repay home loans before extending them credit. The CFPB’s “qualified mortgage” rule, which became effective on January 10, 2014, describes certain minimum requirements for lenders making ability-to-repay determinations, but does not dictate that they follow particular underwriting models. Lenders will be presumed to have complied with the ability-to-repay rule if they issue “qualified mortgages,” which are generally defined as mortgage loans prohibiting or limiting certain risky features. Loans that do not meet the ability-to-repay standard can be challenged in court by borrowers who default, and the absence of ability-to-repay status can be used against a lender in foreclosure proceedings. Any loans that we make outside of the “qualified mortgage” criteria could expose us to an increased risk of liability and reduce or delay our ability to foreclose upon the underlying property. Any decreases in loan origination volume or increases in compliance and foreclosure costs caused by the rule could negatively affect our business, operating results and financial condition. The CFPB also has adopted a number of additional requirements and issued additional guidance, including with respect to appraisals, escrow accounts and servicing, each of which entails increased compliance costs. In addition, the CFPB likely will continue to make rules relating to consumer protection, and it is difficult to predict which of our products and services will be subject to these rules or how these rules will be implemented.

Compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act has increased our regulatory compliance burdens, and may increase our operating costs and may adversely impact our earnings or capital ratios, or both.

Signed into law on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act has represented a significant overhaul of many aspects of the regulation of the financial services industry. Among other things, the Dodd-Frank Reform Act created the CFPB, tightened capital standards, imposed clearing and margining requirements on many derivatives activities and generally increased oversight and regulation of financial institutions and financial activities.

In addition to the self-implementing provisions of the statute, the Dodd-Frank Reform Act calls for over 200 administrative rulemakings by numerous federal agencies to implement various parts of the legislation. While many rules have been finalized or issued in proposed form, additional

rules have yet to be proposed. It is not possible at this time to predict when all such additional rules will be issued, their final form or requirements, their applicability to the Company or the Bank, or when they will be implemented.

The cost of complying with the new consumer protection regulations and policies could adversely affect our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act created the Consumer Financial Protection Bureau (the “CFPB”), a new regulatory entity with broad powers to supervise and enforce consumer protection laws. The CFPB has extensive rulemaking authority for a wide range of consumer protection laws that apply to banks and other types of lenders, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. It also has examination and enforcement authority over all banks with more than $10 billion in assets. Institutions with less than $10 billion in assets, like us, are examined for compliance with consumer protection laws by their primary bank regulators, but these regulators defer to the CFPB’s rules and interpretations in evaluating a bank’s compliance with consumer protection laws. Therefore, although the CFPB does not directly supervise us, the actions of the CFPB significantly impact our operations.

The CFPB has set forth numerous rules and guidance documents since its inception concerning a wide range of consumer protection laws, many of which are directly applicable to our operations. For example, the CFPB recently imposed new requirements regarding the origination and servicing of residential mortgage loans, limitations on the manner in which loan originators may be compensated, mandatory disclosures on documentation given to borrowers, and an obligation on the part of lenders to verify a borrower’s “ability to repay” a residential mortgage loan before extending credit, among others. The CFPB likely will continue to make rules relating to consumer protection, and it is difficult to predict which of our products and services will be subject to these rules or how these rules will be implemented. However, compliance with CFPB regulations likely will result in additional operating and compliance costs that could have a material adverse effect on our business, consolidated financial condition, results of operations, or cash flows.

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a small reporting company)	Smaller reporting company	☒
Emerging growth company	☐


PART 1. FINANCIAL INFORMATION		4

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4

	Condensed Consolidated Statements of Condition at June 30, 2017, and December 31, 2016	5

	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016	6

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016	7

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 4.	Controls and Procedures	52

PART II. OTHER INFORMATION		53

Item 1A.	Risk Factors	53

Item 6.	Exhibits	55

Signatures		56

Exhibit Index



Exhibit 31.01 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley At of 2002

Exhibit 31.02 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.01 Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101.INS XBRL Instance Document.

Exhibit 101.SCH XBRL Taxonomy Extension Schema Document.

Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.

Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document.

Exhibit 101.LAB XBRL Taxonomy Extension Labels Linkbase Document.

Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

	June 30, 2017		December 31, 2016
Commitments to extend credit	$	156,419	$	152,585
Letters of credit:
Standby letters of credit	$	49,337	$	52,396
Commercial letters of credit		3,070		3,045
Total	$	52,407	$	55,441

	Six Months Ended June 30,
	2017			2016
Beginning balance	$	1,527		$	1,462
Realized and unrealized net gains:
Included in net income		(12	)		64
Included in other comprehensive income		-			-
Purchases, issuance and settlements
Purchases		-			-
Issuances		-			23
Settlements		-			-
Ending balance	$	1,515		$	1,549

	Six Months Ended June 30,
	2017			2016
Net unrealized (loss) gain on available for sale securities	$	(2,601	)	$	1,100
Amounts reclassified from AOCI for (loss) gain on sale of investment securities available for sale included in net income	$	13		$	(130	)
Tax effect		880			(330	)
Unrealized holding (loss) gain on available for sale securities, net of tax		(1,708	)		640
Gross unrealized holding loss on held to maturity securities		(1,620	)		(2,065	)
Amortization of unrealized holding loss on held to maturity during the period		215			219
Unrealized holding loss on held to maturity securities		(1,405	)		(1,846	)
Accumulated other comprehensive income	$	(3,113	)	$	(1,206	)

	June 30, 2017		December 31, 2016		Variance
Interest-earning deposits with financial institutions (including restricted cash)	$	180,060	$	151,313	$	28,747
Federal Home Loan Bank stock, at cost		2,303		1,855		448
Investment securities available for sale		440,885		419,880		21,005
Investment securities held to maturity		92,922		96,167		(3,245	)
Loans, gross		1,162,663		1,176,007		(13,344	)
Total interest-earning assets	$	1,878,833	$	1,845,222	$	33,611

	December 31,				June 30,
	2015		2016		2017
Guam	$	671,579	$	709,715	$	653,455
Commonwealth of the Northern Mariana Islands	$	71,975	$	74,379	$	74,612
The Freely Associated States of Micronesia *	$	56,301	$	75,324	$	82,059
California	$	254,395	$	298,627	$	334,380
Total	$	1,054,250	$	1,158,045	$	1,144,506

	June 30, 2017					December 31, 2016
	Balance		Average rate			Balance		Average rate
Interest-bearing checking accounts	$	260,956		0.12	%	$	346,922		0.11	%
Money market and savings accounts		999,620		0.17	%		904,215		0.18	%
Certificates of deposit		49,701		0.30	%		58,082		0.33	%
Total interest-bearing deposits	$	1,310,277		0.17	%	$	1,309,219		0.17	%

Years ending December 31,
2017	$	567
2018		1,531
2019		1,305
2020		1,208
2021 and thereafter		20,764
Total lease commitments	$	25,375

Exhibit No.		Exhibit

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

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

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

101		Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Unaudited Condensed Consolidated Statements of Condition as of June 30, 2017, and December 31, 2016, (ii) Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016, (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2017 and 2016, and (v) Notes to Unaudited Condensed Consolidated Financial Statements

	BANKGUAM HOLDING COMPANY

Date: August 9, 2017	By:	/s/ LOURDES A. LEON GUERRERO
		Lourdes A. Leon Guerrero, President and Chief Executive Officer

Date: August 9, 2017	By:	/s/ FRANCISCO M. ATALIG
		Francisco M. Atalig, Senior Vice President and Chief Financial Officer