KBRA Assigns Ratings to Central Pacific Financial Corp.

Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 for Honolulu, Hawaii-based Central Pacific Financial Corp. CPF ("Central Pacific" or "the company"). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for its subsidiary, Central Pacific Bank. The Outlook for all long-term ratings is Stable.

The ratings are supported by CPF's quality core deposit franchise, which reflects a considerable portion of noninterest-bearing deposits (+30% of total). The favorable funding mix has facilitated very low deposit costs historically, which declined to 20 bps for 2Q20. CPF's ability to maintain below-peer funding costs has reinforced a durable NIM, which is crucial given the reliance on spread revenues—with NII generally representing +80% of revenues. Given this, earnings power has been preserved in recent periods. KBRA also considers CPF's enhanced underwriting standards and the de-risking of the loan book since the global financial crisis (GFC) favorably. These initiatives drove a materially decreased concentration in C&D (2% of loans) and mainland U.S. lending (11%), which both caused significant issues during the GFC. Central Pacific currently reflects a lower credit risk profile, evidenced by the RWA density tracking below peers. This is due to the emphasis on high quality residential mortgage loans, which include conservative borrower profiles (low LTVs and above average FICO scores).

Despite the stability in profitability in recent years, CPF's core earnings capacity is somewhat lower than many peers. As a result, the company's ability to absorb potentially higher credit costs from an earnings standpoint is theoretically below average. Furthermore, KBRA acknowledges that the Hawaiian economy reflects potentially greater uncertainty given the reliance on the tourism industry (~20% of GDP). With that said, ALLL and capital levels are adequate for its risk profile, and current ratings expect relative stability in capital ratios moving forward. Additionally, KBRA takes comfort in the relatively lower exposure to retail and hospitality lending at 9% of total loans, or 66% of total risk-based capital.

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KBRA continues to monitor the potential direct and indirect effects of the coronavirus on the banking sector, among others. Please refer to our publication U.S. Bank 2Q 2020 Ratings Compendium for our latest thoughts.

The ratings are based on KBRA's Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019.

Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

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