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) ("Central Pacific" or "the company"). 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.

The ratings are supported by CPF’s quality deposit franchise, which has continued to grow in recent years despite liquidity leaving the system from the Fed’s tightening measures. While the core deposit composition has declined relative to total funding (86% as of 2Q23 vs. a peak of 91% at YE21), this has been due to a shift in the mix rather than outflows as jumbo time deposits (categorized as noncore funding from a regulatory perspective, though, in our view, CPF’s larger CD customers are generally relationship-based and reflect a long tenure with the institution) have seen meaningful growth from higher interest rates, while true wholesale reliance, brokered deposits and FHLB borrowings, remain very low at just $50 million in total as of 2Q23. However, we recognize that the company’s uninsured/uncollateralized balances are modestly above peer at 35% of total, though these relationships appear to have longevity, and liquidity sources are ample at $3.0 billion covering 128% of those balances. As noted, there has been a migration in the deposit mix, though NIB balances remain favorable at 30% of total, which, combined with the concentrated Hawaiian banking market, facilitate CPF’s respectable deposit market share, supporting very low deposit costs that have persisted throughout various interest rate cycles, including the recent rate hiking regime as the cost of deposits are well below peer at 84 bps for 2Q23 (among the bottom 10 for all of KBRA’s publicly traded banks). KBRA also favorably views Central Pacific’s sound credit quality metrics in recent years, which have 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 (5% of loans) and mainland U.S. lending. While there has been a modest uptick in NCO activity in 1H23, this has been largely due to the mainland U.S. consumer portfolio, though loss rates remain in line with expectations and the book reflects strong risk-adjusted margins. With that said, management has paused portfolio purchases until there is more clarity around the economic environment, notably in consumer credit. Moreover, CPF reflects a lower credit risk profile, in our view, due to the emphasis on high quality residential mortgage loans, which reflect conservative borrower profiles, notably low LTVs and super-prime FICOs. Additionally, exposure to the office sector is considered minimal at 4% of loans and with a nominal amount of repricing occurring over the near-term. Furthermore, the Hawaiian economy continues to reflect strength following the headwinds on the tourism industry during the pandemic, though the recent wildfires in Maui have presented some challenges to the state, but CPF’s exposure in considered manageable, with losses not expected to be material at this point. Given the NIM compression, which has been less pronounced than peers due to CPF's lower-beta deposit base, profitability has decreased, though remains in line with the peer average. Moreover, management stated that there is visibility to a NIM trough, which is expected to be between 2.80%-2.90% (2.97% for 2Q23). Capital ratios have rebounded in 1H23 due to the slower loan growth and minimal share repurchases, which are expected to persist the remainder of the year. The company’s CET1 ratio of just below 11.0% is considered adequate for the rating group, and ratios are projected to continue to rise in the near-term. Despite the meaningfully-sized securities portfolio (18% of total assets), which reflects a longer duration than most peers given the concentration in government agency bonds, the unrealized losses are considered manageable, with the CET1 ratio remaining at 8.0% when factoring in losses from both AFS and the HTM portfolio.

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