OREANDA-NEWS. Fitch Ratings has downgraded and withdrawn the 'BBB-' ratings for BankGuam Holding Company (BGHC) and Bank of Guam. The rating Outlook was revised to Stable from Negative. The downgrades reflect lower capital ratios year over year, continued strong out of market loan growth year over year and continued weak earnings. The ratings are being withdrawn for commercial reasons. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS - IDR and VR

BGHC 'BBB-' Issuer Default Rating (IDR) and Viability Rating (VR) reflect its solid franchise and deposit base in Guam as well as relatively stable performance through the cycle. These strengths are balanced against the high loan growth outside its home market, low profitability relative to peers due to its high cost structure, and weakening capitalization relative to its rated peer group.

Capital is a ratings weakness for the company. Tangible common equity declined 90 basis points (bps) to 6.24% between year-end 2013 and 3Q'14. The large reduction to capital was outside of Fitch's expectation for capital management. Tangible capital levels rank near the bottom of Fitch's U.S. universe of rated banking institutions. Asset growth has outpaced retained earnings after dividend payments. BGHC has maintained a dividend payout ratio of approximately 45% to 50% of net income.

Asset quality has historically been strength for the company. Current asset quality metrics remain stable. At 3Q'14, nonperforming assets as a percentage of gross loans totaled 2.75%, which is 1bp higher than year end 2013. Net charge-offs peaked at just 66 bps in 2009, which compares very favorably to the banking sector. However, Fitch believes BGHC's mainland growth could lead to asset quality metrics that are weaker than the company's historically solid levels. In addition, Fitch remains concerned about the concentration risk in its loan portfolio as the bank holds large individual loans that represent significant portions of capital.

Earnings performance remains a relative weakness for the company. BGHC's return on average assets through 3Q'14 totaled 61bps, down from 77bps for full year 2013. Earnings declined due to margin compression, higher provisions and lower fee income. Due to BGHC's higher cost structure from overhead expenses, earnings typically lag behind similarly sized community banks.

BGHC has a solid funding profile and good deposit franchise. BGHC's loan to deposit ratio is low at 65%. Competition for deposits in Guam is dominated by three competitors, which collectively control 89% of deposits on the island. BGHC owns 35% of the deposit market share in Guam, which ranks first in terms of market share. BGHC's good deposit franchise translates into interest bearing funding costs at 43bps, which compares favorably to peer banks with total assets between \$1 billion to \$3 billion in total assets.

Economic conditions in Guam have continued to improve. Employment is up 1.2% at September 2014 from the prior year, while weekly private earnings are up 1.9%. Almost half of Guam's GDP is dependent on government/military spending. Tourism is the second largest contributor to economic activity on the island. Visitor arrivals have improved modestly year over year with a 0.7% increase in total arrivals through third quarter 2013. BGHC's loan portfolio has performed well through various economic cycles on the island. That said, stronger economic conditions should benefit BGHC's Guam-based loan portfolio which accounts for 64% of total loans.

SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS

Bank of Guam is a wholly owned subsidiary of BGHC. Bank of Guam's ratings are aligned with BGHC reflecting Fitch's view that the bank subsidiary is core to the franchise.

SUBSIDIARY AND AFFILIATED COMPANY RATING SENSITIVITIES

Rating sensitivities are no longer relevant given today's rating withdrawal.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

BGHC's Support Rating and Support Rating Floor of '5' and 'NF' reflect Fitch's view that the company is unlikely to procure extraordinary support should such support be needed.

KEY RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

Rating sensitivities are no longer relevant given today's rating withdrawal.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSITS

Bank of Guam's long- and short-term deposit ratings reflect Fitch's view of how these deposits would be treated in a liquidation by the FDIC.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSITS

Rating sensitivities are no longer relevant given today's rating withdrawal.

Fitch has downgraded and withdrawn the following ratings:

BankGuam Holding Company (BGHC)
--Long-term IDR to 'BBB-' from 'BBB'; Outlook to Stable from Negative;
--Short-term IDR to 'F3' from 'F2';
--Viability rating to 'bbb-' from 'bbb'.

Bank of Guam (BOG)
--Long-term IDR to 'BBB-' from 'BBB'; Outlook to Stable from Negative;
--Short-term IDR to 'F3' from 'F2';
--Viability rating to 'bbb-' from 'bbb'
--Long-term deposits to 'BBB' from 'BBB+';
--Short-term deposits to 'F3' from 'F2'.

Fitch has affirmed and withdrawn the following ratings:

BankGuam Holding Company (BGHC)
--Support rating at '5';
--Support rating floor at 'NF'.

Bank of Guam (BOG)
--Support rating affirmed at '5';
--Support rating floor affirmed at 'NF';