Fitch Affirms Central Pacific Financial's LT IDR at 'BB+ Following Community Bank Peer Review

NEW YORK--()--Fitch Ratings has affirmed Central Pacific Financial's (CPF) Long-term Issuer Default (IDR) at 'BB+' with a Stable Outlook. The rating reflects current performance in line with the 'BB+' group as well Fitch's expectation that CPF's financial performance and company profile will remain stable over the medium term.

KEY RATING DRIVERS - IDRs, VRs AND SENIOR DEBT

CPF's 'BB+' rating reflects solid asset quality metrics and earnings in line with the rating category. Additionally, Fitch's rating assumes CPF's strategic goals and balance sheet targets remain in line with Fitch's assumptions. Most notably, Fitch expects CPF to normalize capital levels, grow loans as a percentage of total assets, maintain low levels of construction exposure and avoid meaningful mainland loan exposures.

Now that the bulk of CPF's asset quality and regulatory issues are resolved, Fitch believes earnings growth is more of a focal point for the company. To improve returns, Fitch notes that CPF plans to normalize its balance sheet through loan growth. Fitch expects CPF to grow its loan to deposit ratio from 70% to approximately 80% to 85% over time. In the interim, CPF has grown its syndicated national credit portfolio (SNC) to augment organic loan growth.

To generate additional loan growth, CPF has kept increasing amounts of residential loans on the balance sheet. Regulatory filings show that 20% of loans and securities have repricing dates over 15 years out compared to just 7% for peers. Fitch believes CPF's low-cost, sticky deposit franchise alleviates some of the interest rate risk inherent in holding longer duration assets. Although CPF's interest rate model points to a fairly neutral balance sheet, Fitch remains cautious on the amount of potential extension risk that the company might see from its residential loan portfolio in a rising rate environment.

Asset Quality continues to improve. Nonperforming assets declined 108 basis points (bps) to 2.6% of gross loans and foreclosed assets. Fitch expects continued gradual reduction of non-performing assets (NPAs) over the near term. Credit costs remain low; net charge-offs totalled just 7bps through first half 2014 (1H'14) and 5bps in 2013. CPF's reserves for loan losses remains strong. Fitch expects CPF to continue to manage down reserve levels through either negative provisions or reserve releases going forward.

CPF's capital levels are strong. Tangible common equity (TCE) totalled 11.7% of tangible assets, which ranks highest among Fitch's community bank peer group. Fitch expects the company to manage TCE levels to a 9% to 10% range going forward.

Profitability remains in line with CPF's rating category with a return on average assets at 0.79% through 1H'14. CPF's earnings include some benefit from reserves. Fitch does not anticipate meaningful improvement in core earnings in the near term.

RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT

Fitch believes CPF's ratings can move higher given sustained asset quality performance, moderated organic growth and improved earnings.

CPF's ratings could move lower given a meaningful shift in medium-term strategic goals. Reduction of TCE below Fitch's expected 9% to 10% range or a loan-to-deposit ratio well above Fitch's 80% to 85% expectation could result in a ratings downgrade. Further, significant net interest margin (NIM) compression in a rising rate environment could lead to a ratings downgrade as the amount of long duration assets remains a risk that Fitch will continue to monitor.

Although not anticipated, significant construction loan concentrations and loan exposure to the mainland could lead to a ratings downgrade. Fitch expects current and future management teams to keep strategic loan growth confined within Hawaii and to keep construction loan exposure to low levels.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

CPF's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by the trust bank and its subsidiaries are primarily sensitive to any change in the company's IDR. This means that should a Long-term IDR be downgraded, deposit ratings could be similarly affected.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

CPF's trust preferred stock rating at 'BB-' is two notches below CPF's Viability Rating (VR) of 'BB+ in accordance with Fitch's assessment of the instruments' non-performance and loss severity risk profiles.

KEY RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of CPF's trust preferred securities are sensitive to any change in the company's VR.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

CPF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CPF is not systemically important and therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

CPF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - HOLDING COMPANY

The IDR and VR of CPF are equalized with its operating company, Central Pacific Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.

KEY RATING SENSITIVITIES - HOLDING COMPANY

If CPF became undercapitalized or increased double leverage significantly there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

Fitch has affirmed the following ratings:

Central Pacific Financial Corp.

--Long-term IDR at 'BB+';

--Viability rating at 'bb+';

--Short-term IDR at 'B'.

--Support Rating Floor at 'NF';

--Support affirmed at '5'.

Central Pacific Bank

--Long-term IDR at 'BB+';

--Viability Rating at 'bb+';

--Short-term IDR at 'B'

--Long-term deposits at 'BBB-';

--Short-term deposits at 'B';

--Support Rating Floor at 'NF';

--Support Rating at '5.'

CPB Capital Trust I, II & IV

CPB Statutory Trust III & V

--Trust preferred securities at 'BB-'.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria (Jan. 31, 2014');

--'Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012)';

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria (Jan. 31, 2014)';

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles (March 27, 2014)';

--'U.S. Banking Quarterly Comment: 2Q14 (July 2014');

--'U.S. Banks: Liquidity and Deposit Funding (Diminishing QE Effectiveness and its Impact on Systemic Liquidity and Funding)' (Aug. 8, 2013);

--'U.S. Bank Mergers and Acquisitions' -- When Will The Catalysts Kick In? (July 11, 2013)

--'U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)' (June 18, 2013)

--'U.S. Banks: Home Equity Reset Risk Hitting the Reset Button in 2014' (April 29, 2013)

--'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)' (Sept. 17, 2012);

--'Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)' (Aug. 7, 2012);

--'Risk Radar' (April 2014);

Applicable Criteria and Related Research:

Risk Radar Global 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742560

Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685638

U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688330

U.S. Banks -- Home Equity Reset Risk Hitting the Reset Button in 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706915

U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875

U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539

U.S. Banks: Liquidity and Deposit Funding

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=879975

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Contacts

Fitch Ratings
Primary Analyst:
Jaymin Berg, +1-212-612-0368
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Ryan Doyle, +1-212-908-9162
Director
or
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Jaymin Berg, +1-212-612-0368
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Ryan Doyle, +1-212-908-9162
Director
or
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com