KBRA Affirms Ratings for Central Pacific Financial Corp.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Honolulu, Hawaii-based Central Pacific Financial Corp. (NYSE: CPF). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its main subsidiary, Central Pacific Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by CPF’s high-quality deposit franchise, which has reflected a very low beta throughout the current interest rate cycle and helped support a respectable NIM especially in the context of its lower risk loan portfolio, and, in turn, decent earnings amidst a challenging operating environment (ROA just below 0.8% for 1H24). Moreover, KBRA positively views the strengthened capital position, notably risk-based measures (CET1 ratio of 11.9% as of 2Q24), over last six quarters, though it has admittedly been due to minimal balance sheet growth during this time. With regard to the funding profile, which is almost entirely core deposit funded, the deposit costs (1.33% for 2Q24) rank among the lowest of all of KBRA rated publicly traded banks (bottom 5) and have been reinforced by conservative liquidity management, a favorable mix, including a 28% NIB component that has largely stabilized since YE23, and its meaningful market share in Hawaii, though this somewhat benefits from the absence of competition from national banks. With that said, deposit costs have tracked lower than larger peers in footprint, which illustrates a degree of loyalty from customers. One modest mitigant to the deposit franchise is a higher level of uninsured accounts, though this is largely offset by minimal volatility and comfortable liquidity measures in recent periods. KBRA also favorably views the sound credit quality metrics in recent years, which has been supported by the prolonged benign credit environment, as well as the enhanced underwriting standards and de-risking of the loan book since the global financial crisis, including a materially decreased concentration in C&D and mainland U.S. lending. While there has been a modest uptick in NCO activity in 2023/2024, this has been largely due to the mainland U.S. consumer portfolio (<5% of total loans), though loss rates peaked in late-2023 and have been on the decline since that time. Moreover, these NCOs have been in line with management’s expectations, and the book has continued to reflect strong risk-adjusted margins. With the potential headwinds facing the industry, we believe CPF reflects a lower credit risk profile due to the emphasis on high-quality residential mortgages with low LTVs and super-prime FICOs as well as a minimal investor CRE exposure.

Rating Sensitivities

A rating upgrade is not expected, though maintenance of solid credit quality, capital, and funding/liquidity ratios, while achieving further scale and stronger returns could result in positive momentum over time. Conversely, a downgrade is unlikely, though any significant deterioration in the funding/liquidity position, or above peer credit issues resulting in a decline in earnings/capital could potentially pressure ratings.

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Methodologies